On the other end of growth investing sits value investing, a category made popular by Warren Buffett. Buying shares in solid businesses that are trading for less than what you think they're worth can be a lucrative investment strategy -- if you have patience. It certainly helped make the Oracle of Omaha one of the best investors of all time.
Do you have $5,000 ready to invest and a penchant for seeking out value stocks? If so, you'd be wise to consider the following three businesses.
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1. Crocs
Crocs (CROX -1.16%), maker of the popular foam clogs, has been a surprise winner during the pandemic as consumers favored affordability and comfort. Sales in 2021 jumped 67%, while net income soared 132% over the prior year. The business also had a 63.4% gross margin in Q4, which is incredible when you consider that the average selling price of a Crocs product is only $25.71.
This remarkable performance, however, hasn't done much to boost Crocs' valuation, which currently sits at a price-to-earnings (P/E) ratio of just 5.9. That's less than peers like Skechers and far lower than industry heavyweight Nike. In fact, Crocs' shares are down 63% since peaking in mid-November. This is a booming brand with a current valuation that doesn't make any sense if you consider the fundamentals.
By 2026, management believes that Crocs, including the recently completed acquisition of HeyDude, will generate $6 billion in annual sales. That's nearly triple 2021's total of $2.3 billion. And at that time, free cash flow should exceed $1 billion per year. Keeping the brand relevant with new-product introductions and ongoing celebrity collaborations, while driving growth in Asia, will help to propel Crocs.
Based on the market cap of $4 billion on March 7, Crocs sells for four times 2026 estimated free cash flow. That's a ridiculous bargain that investors may want to pounce on right now.
2. Lowe's
With trailing 12-month sales of $151.2 billion, Home Depot is the undisputed leader in the home-improvement industry. Its P/E ratio of 21 exceeds smaller-rival Lowe's (LOW -0.84%), with a P/E of 19. But the latter is making moves that could help it close the gap with its larger competitor, and investors may want to pay attention.
Lowe's CEO Marvin Ellison joined the company in 2018 after 12 years in senior-level roles at Home Depot. And with his arrival, Lowe's began to focus relentlessly on a strategy that was long overdue -- catering to professional customers. While Home Depot gets nearly half of its revenue from Pros, Lowe's generates about 25% of sales from this lucrative customer group that spends more money and visits stores more often.
Being behind Home Depot leaves plenty of opportunity for Lowe's to gain market share. Initiatives like new store layouts, better inventory availability, and a Pro loyalty program should help boost Lowe's standing with professionals. This should lead to improved sales, margins, and profitability, all of which should support share-price appreciation.
Over the past five years, Lowe's has grown net income at a faster clip than Home Depot (174% compared to 107%). And the former's share price has outperformed the bigger competitor's over the past one, three, five, and 10 years. Still, the stock trades at a slight discount to Home Depot, leaving investors with sizable upside.
3. Target
Compared to massive-retailer Walmart (WMT -0.73%), which trades for a P/E multiple of 29, Target (TGT -2.14%), with its P/E of just 15, looks like an absolute steal. And the stock yields 1.7%. Momentum that started during the pandemic has shown no signs of slowing down.
In the most recent fiscal year (ended Jan. 29), Target's revenue of $106 billion was more than 35% higher than just two years ago. Consumers are increasingly turning to the top retailer to satisfy all their shopping needs.
Target continues to benefit immensely from its focus on providing an omnichannel experience, something that is table stakes for any retail business these days. The company's stores act as local hubs. In fact, in the past quarter 96.3% of sales were fulfilled by a store even though 21.8% of sales were originated via digital channels. This situation reduces logistics costs while at the same time enabling wide inventory availability for customers.
For fiscal 2021, same-store sales jumped 12.7% year over year with all five merchandise categories registering double-digit gains. And over the past two fiscal years, Target has posted mid-to-high-teens revenue growth, the fastest rate in at least the past 17 years. These gains have significantly outpaced Walmart's.
Over the long term, however, growth will likely moderate to mid-single digits while earnings per share should rise in the high-single digits. But if you combine this with a generous dividend and share-buyback program, buying Target stock may be a no-brainer decision.
