It's hardly news that stocks have gotten cheaper since the start of 2022. The S&P 500 is down over 20% this year, stocks are now in a bear market, and the average price-to-earnings (P/E) ratio is down to just under 20.
While this is well below the all-time high multiple of close to 40, which was hit at the end of 2021, the market's current P/E is actually still above its long-term average of 16. With interest rates continuing to rise around the world, it's hard to argue that stocks are cheap at the moment.
But just because the market is trading above its long-term average P/E ratio doesn't mean that every stock is trading at a premium valuation. Here are two growth stocks at cheap valuations that deserve a look for your portfolio today.
1. Revolve Group: Consistent growth in fashion e-commerce
Revolve Group (RVLV 2.24%) is an online fashion retailer that owns the websites Revolve and Forward. Through its influencer marketing strategy and heavy presence on social media, the company has become a household name for younger women shoppers over the past few years. Active customers over the past 12 months hit 2.25 million around the world, up 34% year over year and more than double its 2018 numbers.
With consistent revenue growth (aside from 2020, when many people paused their fashion purchases), Revolve has become a sizable business. In the third quarter, it generated $222 million in revenue, up from just $82 million in Q3 of 2017. With only 2.25 million active shoppers around the world -- and potentially tens of millions more -- Revolve Group stands to put up similar growth numbers over the next five years. The fashion industry is sizable with over $1.7 trillion spent on clothing items each year, giving Revolve Group a huge opportunity to go after.
Revolve's stock is down 62% this year and now sports a market cap of $1.57 billion. The company has $244 million in cash and zero debt, and its enterprise value (EV) is around $1.33 billion.
Over the last 12 months, Revolve generated a net income of $85 million. Compared to its EV, that gives the stock a trailing EV/E (enterprise value divided by trailing earnings) of 15.6, right around the market's long-term average. For a company that has a track record of consistently high revenue growth, this earnings multiple seems much too cheap.
2. Sprouts Farmers Market: A long runway for store growth
My second cheap stock is Sprouts Farmers Market (SFM 0.09%), a niche grocery chain that focuses on a selection of healthy and diet-focused food for its customers. It has 378 stores spread out around the West Coast, Texas, and southern parts of the United States, with plans to grow its store count by 10%+ a year for the foreseeable future.
Sprouts isn't competing with Wal-Mart, Costco Wholesale, or Kroger for grocery spending, but it doesn't need to do so. By targeting the wealthier consumer who doesn't want the standard grocery items at those other stores, Sprouts Farmers Market should be able to double its store count over the next decade as it expands around the country. Positive comparable-store sales growth should lead to revenue more than doubling during that time span.
SFM Operating Margin (TTM) data by YCharts.
Since new management took over in 2019, the company increased and then stabilized its operating margin at around 5.5%, which is where it sits today. Over the past 12 months, Sprouts has generated a net income of $250 million, which should more than double over the next decade if store count doubles and margins stay where they are today.
With a market capitalization of $3.1 billion, the stock trades at a trailing price-to-earnings ratio (P/E) of 12.4, which is well below the market average. For a business that generates consistent profits and has a clear path to growing its revenue, a P/E this low is much too cheap for Sprouts Farmers Market stock.
