The bear market has instilled fear in many investors, leading them to second-guess even quality companies with solid growth potential. As a result, there are some undervalued stocks out there that, as things stabilize in the economy, could look like steals.
And even before the economy fully recovers from a possible recession next year, a more bullish outlook may send shares of beaten-down stocks higher. A couple of struggling stocks that may look like bargains in a year at their current prices are Align Technology (ALGN 0.01%) and Roku (ROKU +0.58%).
1. Align Technology
Invisalign maker Align Technology is a healthcare business that still hasn't recovered from the effects of the pandemic. And the current inflationary environment isn't making things any better.
According to a poll from the Delta Dental Institute, close to half of U.S. adults have put off dental cleanings, and inflation has been a key reason for that delay. Dental cleanings cost a fraction of what braces cost, and so if consumers are putting off basic dental care, Align's not-so-cheap aligners that can run into the thousands are likely to face even greater headwinds.
NASDAQ: ALGN
Key Data Points
But putting off dental care can simply make things worse for patients in the long run. And so while Align may struggle in the near term, demand for the company's clear aligners could soar as inflation comes down and consumers stop putting off dental expenses that they may view as discretionary right now.
In its most recent quarter (ended Sept. 30), Align's sales of $890.3 million were down 12% from the prior-year period. Worsening margins hit the company with another punch that lowered Align's operating profits to just $143.7 million -- down 45% from a year ago.
Things don't look great for Align today, but with the stock trading around levels not seen since April 2020, now can be an opportune time for long-term investors to load up on the stock. And if there are signs of recovery taking place next year, shares of Align could be due for a big rally. At 30 times earnings, the stock is trading well below its five-year average of 54.
2. Roku
Streaming company Roku is a business I've been keeping a close eye on all year. That's because while it has been struggling due to weak advertising demand, that's not a long-term problem that's going to weigh down the stock. The company's streaming devices, which help turn regular TVs into smart ones, play a vital role in the streaming wars.
Earlier this year, there were rumors that Netflix was looking at buying Roku. Hardware could be a missing piece that unlocks more growth for the streaming giant. It would also give its users a controller that they could utilize as Netflix dives further into gaming. With Roku's valuation at around just $7 billion, it wouldn't be an impossible acquisition for a company like Netflix, which has more than $6 billion in cash and short-term investments.
NASDAQ: ROKU
Key Data Points
But even if a deal doesn't end up happening for Roku, the business itself could make for a worthy investment. Its 65.4 million accounts as of the end of September were up 16% from the prior-year period. The company also reported that its Roku Channel, which offers users free content, had a 90% increase in streaming hours.
Although Roku has incurred an operating loss for three consecutive quarters, the company should return to profitability as the ad market recovers. And that could happen as early as next year if fears of a recession subside, which is what Roku says is hindering demand right now.
Roku looks like a bargain as the stock hasn't been this cheap since early 2019. If you're willing to buy and hold, this may prove to be a great investment for your portfolio in the long run. However, investors should be aware that things could get worse before they get better for Roku.
