All of a sudden value stocks are hot. The Nasdaq has fallen nearly 20% from its peak in November, and high-growth stocks have gotten hit even harder with Cathie Wood's ARK Innovation ETF down around 50% from its all-time highs.
In this kind of environment, it makes sense to shift your focus from high-priced, unprofitable growth stocks to overlooked value stocks. While value stocks have a reputation for being sleepy and slow growers, some undervalued stocks actually do have explosive growth potential.
Let's take a look three dirt-cheap stocks that could skyrocket.
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1. Carparts.com
Carparts.com (PRTS -2.40%) is the leading, pure-play online retailer of auto parts. Unlike many retail sectors, only a small percentage of auto parts sales have moved online, leaving a lot of potential growth for pure-play e-commerce companies like Carparts.com. The online retailer also offers a number of competitive advantages over the brick-and-mortar chains like O'Reilly Automotive and AutoZone.
Most of the products that Carparts.com sells are private label, meaning the company can undercut its competitors by as much as 50%. It's also been rapidly expanding its warehouse network with plans to add a new warehouse in Florida this quarter, giving it seven across the country. Adding new warehouses both expands capacity and speeds up delivery time; the company's long-term goal is to serve more than 80% of the country with one-day delivery. Recently, management has said that supply rather than demand has been the primary constraint on sales growth, so growing inventory is key to driving growth.
Revenue jumped 34% last year to $582.4 million, and the company is targeting long-term revenue growth of 20%-25% annually and adjusted EBITDA margins of 8%-10%. Shifting sales to the e-commerce channel should act as a natural tailwind for the company, and it's also experimenting with new ideas like a mobile mechanic that can come to your home and fix your car with parts ordered from Carparts.com
Currently, the stock trades at a price-to-sales ratio of just 0.6, well below comparable online retailers like Wayfair and Chewy.
2. Resolute Forest Products
Commodities stocks are notoriously cyclical, and the boom in lumber prices has been a windfall for lumber stocks. Some are now historically cheap based on typical valuation ratios. For example, Resolute Forest Products (RFP), a Canadian producer of wood products, paper, pulp, and tissue, is currently trading at a price-to-earnings ratio of just 2.
2021 was a unique year in lumber, with sky-high prices last spring. Lumber prices, currently at $880 per 1,000 board feet, are still well-above pre-pandemic levels. And even with the Federal Reserve hiking interest rates, prices for the building material should remain elevated due to the national housing shortage, especially as homeowners are still eager to leverage higher housing prices into home improvements.
While analysts expect Resolute's earnings per share to cool off this year, it's still trading at a P/E of less than four based on earnings estimates for both this year and next. Resolute is also shifting its business through acquisitions and other moves to have more exposure to high-margin wood products, rather than paper-based products.
In other words, if lumber prices remain elevated, Resolute's profits still have the potential to grow from here, and the stock could easily double, or better, from a bit of multiple expansion.
3. RH
RH (RH -5.17%), formerly known as Restoration Hardware, may be one of the best examples of a stock that offers an appealing combination of growth and value.
The high-end home furnishings stock has a strong record -- the stock has increased nearly 1,000% thanks to its strong brand and the leadership of CEO Gary Friedman. Like other home furnishings companies, RH also boomed during the pandemic, driven by lockdowns and spending on things like home offices as Americans spent more time at home.
However, the stock has pulled back more recently, down about 50% from its peak a few months ago, and the company's recent guidance was modest, calling for just single-digit revenue growth in 2022.
As a result of the sell-off, the stock now trades at a P/E of just 13. While growth may be slow this year, the company has plenty of long-term potential, especially as it's experimenting with becoming a lifestyle brand by opening hotels and restaurants, and leasing private jets. It's also planning to launch a streaming service focused on architecture and design, reinforcing its own brand and meeting demand for HGTV-like video content. Additionally, its membership model helps drive customer loyalty and maintain strong operating margins.
With the stock down so much from last fall, now looks like a great time to buy.
