While it can be difficult to distinguish between deeply discounted stocks and falling knives, it remains a tempting area for investors to focus on when hunting for stocks.
Consider Match Group (MTCH -0.72%), Generac Holdings (GNRC 0.46%), and Align Technology (ALGN 0.12%), which are all down at least 68% year to date. They also have the unenviable distinction of being the three worst performers in the S&P 500 this year.
Now may be the perfect time for investors to see if short-term worries have started to outweigh long-term opportunities in these once-promising companies.
1. Match Group
Dating app behemoth Match Group rose over 50% during the height of the pandemic in 2020, riding the strength of its popular Tinder app and match.com website.
However, following decelerating growth, the departure of Tinder's CEO after less than a year, , and a $441 million settlement with Tinder's founders, the market decided to reel in Match's premium valuation.
The stock is down 67% in 2022 alone and the company recently eked out 1% revenue growth compared to last year's third quarter (10% without foreign exchange impacts) on 2% paying customer growth over the same time frame.
Despite this slowdown, Match is a genuine cash cow, generating over $800 million in free cash flow (FCF) annually since 2018. So far in 2022, it has earned $262 million in FCF despite the $441 million settlement -- staying in line with this incredible cash creation.
Also, in addition to its core Tinder app providing 16% sales growth on a foreign exchange-neutral basis, its Hinge app is rapidly being adopted by Gen Z users and is set to benefit from localized product rollouts across Europe.
Best yet, with a market capitalization of roughly $12 billion, Match group trades at 15 times the $800 million in FCF it has averaged annually over the last three years.
While brighter days are likely ahead for Match, its Tinder CEO spot is still vacant. Furthermore, Hinge needs to prove it can be a force internationally, so interested investors would be wise to slowly dollar-cost average into a position over time.
2. Generac
Generac offers power supply reliability in numerous forms -- whether it be home standby generators, portable units, and clean energy storage in its residential segment or heavy-duty solutions in the commercial and industrial unit.
While this may not sound like an exciting growth industry, Generac has seen its sales and earnings per share (EPS) rise by 289% and 364%, respectively, over the last decade. Better yet, over the same time, the company has seen its return on invested capital (ROIC) grow from around 7% to 19%, demonstrating improving profitability of its investments compared to its debt and equity.
GNRC Return on Invested Capital (Annual) data by YCharts
A high and rising ROIC has proven to be a great indicator of a stock's potential to outperform, and Generac ranks in the top quartile of the S&P 500 index when sorted by highest ROIC. The company's energy solutions seem poised to generate outsize share price returns. So why is the stock down 73% year to date?
Generac shares historically traded with an enterprise value of around 12 to 15 times earnings before interest, taxes, depreciation, and amortization (EBITDA); however, that ratio ballooned to over 40 in 2021 as revenue spiked by more than 50% during the year.
GNRC EV to EBITDA data by YCharts
From this lofty valuation, Generac stock sold off harshly as the home standby generator market slowed -- leaving the company's sales to grow by "only" 15% year over year in its most recent quarter.
However, management believes this market will gradually rebound in 2023. Better yet, its clean energy, commercial, and industrial segments should experience substantial growth buoyed by megatrends in their niches, such as the rapid uptake of electric vehicles.
The stock is now trading at its lowest EV-to-EBITDA ratio in the last decade, and curious investors could dollar-cost average into a starter position with Generac and let the company's performance compound returns over the long haul.
3. Align Technology
Despite facing a staggering 70% drop in 2022, Align Technology shares have risen sevenfold in the past decade thanks to the continued success of the company's Invisalign clear aligners.
Helping spur this drop were incredibly tough, stimulus-aided comparable figures from 2021 and patent expirations around some of Invisalign's core technologies. This has opened the company up to competition from generic sources and will test its ability to rely on branding to maintain its once-strong pricing power.
With sales declining 12% year over year during the third quarter, it may feel like the investment thesis in Align is beginning to fall apart. However, it is vital for investors to zoom out just a bit and remember that despite the company's struggles in 2022, its revenue and cash from operations have increased, regardless of volatility, over the last five years.
ALGN Cash from Operations (TTM) data by YCharts
Even with this recent decline in its cash from operations, Align trades well below its average price-to-operating-cash-flow ratio of 34 over the last decade.
ALGN Price to CFO Per Share (TTM) data by YCharts
The company registered its 14 millionth Invisalign patient in Q3 and believes over 500 million people globally could benefit from its aligners and retainers, offering a compelling growth runway for investors. With less than 50% of sales coming from international markets, Align's worldwide growth story is still in its infancy -- especially if it can effectively fight competition from cheaper, generic versions of its products.
While the target market for Align's products is massive, its valuation is still a bit rich for a consumer discretionary business facing negative growth rates recently. While these declines could be temporary, Align's increased competition makes it look more like a falling knife right now, so investors may want to see a return to growth before buying.
