The sell-off in the stock market has many long-term investors focusing more on the best values. But smart investors understand that not all "value stocks" are worth buying. Some are trading cheaply for good reasons and are better avoided at the moment. It's important to base a company's long-term value on solid financials and a clear path to long-term growth.
Some may be tempted to chase household names that have fallen hard, but what's eventually going to move stocks higher is growth, and growth is ultimately built on a company's competitive advantage. With that said, here's why I would steer clear of Bed Bath & Beyond (BBBY) and Hasbro (HAS -0.32%) and suggest you consider two better-value stocks instead.
Why I would avoid Bed Bath & Beyond stock
Shares of Bed Bath & Beyond are down about 65% this year and are nearly at penny-stock status. The current quote of $4.59 might look like a value on the surface, but the company's performance suggests it operates with an outdated store model that e-commerce entrants and other world-class retailers can disrupt.
The company posted a disastrous year-over-year sales decline of 28% last quarter. However, the company's struggles go back much further. After posting steady growth through 2015, sales suddenly flattened before collapsing during the pandemic, when customers started shopping online. This shift highlighted a severe weakness against the emerging threat of new entrants to the market like Wayfair, which now commands twice the market share in home goods as Bed Bath & Beyond, according to YipitData.
Brick-and-mortar stores are having difficulty competing with Wayfair's massive selection spread across its warehouse facilities. While Wayfair might be a viable alternative for some investors, an even better retail stock is RH (RH -4.88%), formerly Restoration Hardware.
Why RH stock is a better buy
RH sells luxury home furnishings through 67 retail galleries and its website. What stands out is the company's profitability. Over the last year, RH earned a net profit of $654 million on $3.8 billion in revenue. That's an uncommon operating margin of 24% for a retailer. Even with revenue growth slowing this year due to a weaker economic environment, RH maintained a solid profit.
RH borrowed Apple's playbook on building a successful retail concept in today's economy. It showcases its offerings through lavishly designed stores, differentiating the RH brand in a highly competitive industry. Revenue exploded during the pandemic, and management sees the potential for at least $5 billion of annual sales in North America, not counting international opportunities.
RH is highly profitable and offers long-term growth at an incredible bargain. The bear market is giving investors a chance to buy this retail growth stock at a cheap price-to-earnings ratio of 10, based on this year's expected earnings -- about half the multiple of the average stock.
Why I would avoid Hasbro stock
The Monopoly, Nerf, and G.I. Joe brands owner hasn't been the same since former CEO Brian Goldner died a year ago. The stock price fell 31%, underperforming rival Mattel. The company's brand blueprint strategy failed to deliver the growth investors expect. After revenue increased by an impressive 17% in 2021, Hasbro saw its top line erode this year, and the economy is not all to blame.
Hasbro's year-over-year revenue decline of 15% in the second quarter comes while Mattel reported flat revenue growth in its corresponding quarter. It was Mattel's ninth consecutive quarter of sales growth on a constant-currency basis. While Hasbro expects the business to return to growth next year, investors have a better choice than buying toy stocks, with a possible recession on the horizon.
Why Walt Disney is the better buy
Hasbro is a tempting stock, given its high dividend yield of 4.1%, but given the sell-off in Walt Disney (DIS -1.56%) stock this year, it makes sense to buy shares of the lucrative owner of Marvel and Star Wars properties. Disney's parks, experiences, and products segment makes up most of the company's operating profit. Hasbro funds a tiny piece of Disney's profit with the royalties it pays Disney to license certain brands for its toys.
Of course, you don't invest in Disney's stock for toys because it's such a small piece of the business, and that's the point. The company is in the business of creating stories and characters and monetizing those characters across theme park ticket sales, merchandise, box office revenue, and Disney+ subscriptions. This business model turns out consistent profits that fuel more content to monetize.
Disney has been repeating this profitable cycle for a century. If the stock wasn't down so much, Mattel or Hasbro might arguably be the better value stock, but investors should take advantage of Disney's lower share price and trade up for better quality. Disney's strategy of monetizing its entertainment properties across different markets will lead to more reliable returns for shareholders over the long term.
