There are plenty of opportunities right now to buy shares of growing companies at much lower valuations than where they were trading a year ago. Investing in industry-leading companies when growth expectations are low is one way to beat the market.
Still, it's important to invest in the right stocks. Three Motley Fool contributors sifted through the rubble of the recent market dip and found three promising stocks trading well off their all-time highs. Here's why TJX Companies (TJX 0.23%), Netflix (NFLX -3.90%), and Chegg (CHGG -1.76%) could soar once all the dust settles.
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The TJX Companies: Down 22%
Jennifer Saibil (The TJX Companies): The TJX Companies, owner of off-price store names such as Marshalls and TJ Maxx, prides itself on posting some of its best performances when the chips are down -- like when there's a recession and shoppers are looking to spend less. But it was badly beaten at the beginning of the pandemic when stores were closed. The nature of this beast is not very digitally inclined, as off-price shopping typically involves daily changing merchandise and the thrill of the deal. Sales declined dramatically at the beginning of the pandemic, and the company's stock price fell. Since the March 2020 crash, TJX stock has struggled to climb back up. But in the 2022 fiscal fourth quarter (ended Jan. 29), it demonstrated a robust rebound, with a 14% year-over-year sales increase to $13.9 billion.
Despite its strong performance, the company is suffering from higher costs associated with inflation and supply chain issues. It posted $0.78 in earnings per share in the 2022 fourth quarter as compared with $0.81 last year.
Although the company deals in off-price merchandise, which could mean it may have a harder time finding inventory, it typically assures shareholders that it has an abundant supply of products to ship to stores throughout its off-price empire. That could be a particular concern in the current environment, when many retailers are dealing with supply chain logjams, but management reassured investors again that it has ample supply with which to stock its stores. It's expecting 3% to 4% U.S. comps growth for the full-year 2023 in light of higher than normal 2022 comps growth of 17%.
At the current low price, TJX shares trade at 23 times trailing-12-month earnings, and its dividend yields 1.7%, well above the S&P 500 average of 1.39%. It's now in its sweet spot of providing shoppers with low-priced goods when costs are rising, and investors should expect the stock price to rebound as well.
Netflix: Down 46%
John Ballard (Netflix): Shares of the leading streaming service are down 46% from their all-time high. Netflix finished 2021 with an impressive 221.8 million paying subscribers globally. But fourth-quarter subscriber totals came in short of analysts' expectations, which explains why the stock has fallen so much. Plus, management guided for just 2.5 million net subscriber additions in the first quarter of 2022, which shows growth continuing to decelerate into the new year.
Netflix's lower share price means the value underneath the shares is much better. The stock now trades at a price-to-earnings ratio of 33 compared to around 50 at the start of 2022. Investors are getting nearly twice as much value for their investment.
If the stock was overvalued in 2021, it's difficult to make that case now, especially given management's belief that the slowing growth is temporary. "We think this may be due to several factors including the ongoing COVID overhang and macro-economic hardship in several parts of the world like Latin America," the company said in the fourth-quarter earnings report.
One factor that looks very bullish for Netflix's future is its expanding operating profit margin. Over the last five years, it has improved from single digits to over 20%, and management expects to grow operating margin at an average increase of 3 percentage points every few years. Higher margins spell a growing production budget, which will only cement Netflix's competitive position as the must-have subscription service. With more than a billion people globally subscribing to a streaming service, Netflix has plenty of room to grow over the long term and deliver returns to investors.
Chegg: Down 69%
Parkev Tatevosian (Chegg): Education technology company Chegg presents an excellent opportunity for long-term investors. The stock is off 68.6% from its high reached in early 2021. Chegg thrived at the pandemic onset as millions of students were sent home for remote learning. The company primarily serves college students worldwide with content that helps them with their studies.
Chegg boasts 75 million pieces of proprietary content explaining concepts covered in college curricula. Students can access this treasure trove through a monthly subscription for roughly $15. In addition to access to existing content, subscribers get to ask 20 questions per month that get answered by subject-matter experts. The question and answer then become available for all subscribers to benefit from.
The highly sought-after material has propelled Chegg to grow revenue from $255 million in 2017 to $776 million in 2021. Further, it delivers this excellent service to students efficiently, and operating income rose from a loss of $23 million to a profit of $78 million in that same time.
Chegg's services are helpful to students whether they are taking online or in-person courses, but more so for online courses. That can partly explain why Chegg's stock surged when universities sent students home for remote learning and crashed when students were asked to return to campus. The other cause of the crash is that college enrollment has fallen. The job market is strong, and wages are rising, giving college-aged individuals compelling employment options.
Nevertheless, the company's long-term prospects are excellent. It has a substantial competitive advantage with the proprietary content. It is expanding internationally. The stock price crash has it trading at a price to free cash flow of 31, near the lowest it has sold for in three years. For those reasons, Chegg stock is a screaming buy in April.
