The market downturn has been brutal, but the good news is that the sell-off is starting to turn up some interesting investment opportunities.
Three Motley Fool contributors recently picked Airbnb (ABNB -0.58%), Williams-Sonoma (WSM -0.35%), and Six Flags Entertainment (SIX +0.00%) as three undervalued stocks that are due for a rebound. Here's why 2023 could be a better year for these forgotten gems.
NASDAQ: ABNB
Key Data Points
Airbnb stock: 54% off from its 52-week high
Jennifer Saibil (Airbnb): Airbnb has quickly transitioned from an unprofitable growth stock to a profitable powerhouse travel leader. After posting soaring, triple-digit growth as travel began to reopen in later phases of the pandemic, it's now slowed down to double-digit growth, along with strong profits.
In the third quarter of 2022, revenue increased 29% to nearly $2.9 billion, and net income improved 46% to $1.2 billion. Airbnb also posted $3.3 billion in free cash flow over the trailing 12 months.
Airbnb has been a true industry disruptor. It offers unique, and often more affordable, travel experiences, along with a platform to find them easily. This has opened up a new world of travel for people who would have otherwise never found these experiences, and it has changed how people view travel.
The flexible platform model supports a broad assortment of categories and has powered the long-term stay trend. This was a game changer over the past few years as remote work became truly mainstream. Long-term stays, of 28 days or more, have remained stable at 20% of total gross nights booked. That's something that was unthinkable when the only easily findable travel accommodations were costly hotel rooms of limited selection in a select group of urban locations.
And it's not going to turn backwards. These kinds of trends will continue to develop, and with its agile model, Airbnb can pivot to support new movements in travel. That gives it a tremendous growth runway.
So why is the stock price down? Partially because the valuation exploded along with the stock price after it went public two years ago, and partially because the market is sinking many stocks that aren't in the "traditionally safe" category, although those both go together. At the lower price, shares are trading at 28 times forward one-year earnings, which is a palatable valuation for a growth stock.
If the tide turns back to a bull market in 2023, Airbnb stock could soar. Even if that doesn't happen soon, Airbnb is a great long-term addition to your portfolio.
NYSE: WSM
Key Data Points
Williams-Sonoma: Off 33% from its 52-week high
Jeremy Bowman (Williams-Sonoma): On the surface, Williams-Sonoma had a strong 2022. Revenue rose 8.3% through the first three quarters of 2022, and comparable sales jumped 8.1% in its most recent quarter, easily outpacing its home furnishings peers that have struggled with a hangover from the pandemic boom.
On the bottom line, the high-end home furnishings retailer, which also owns Pottery Barn and West Elm, didn't disappoint either, with an operating margin of 16.5%, up from 16.2% in the same period in 2021, and earnings per share through the first three quarters jumped 18% to $11.08.
However, you wouldn't know the company produced that kind of results from the stock performance, as shares are now 29% from their 52-week high, setting up an appealing buy opportunity.
Not only has Williams-Sonoma generated strong results on the top and bottom line, but the stock is also stunningly cheap at the moment, trading at a price-to-earnings ratio of just 7. The best explanation for that disconnect seems to be general nervousness about a recession and because the company stepped back from its fiscal 2024 guidance calling for $10 billion in revenue, though that seems to be more of a reflection of a macroeconomic uncertainty than anything else, especially after the company's strong third-quarter results.
The market's reaction seems like an opportunity. Williams-Sonoma's strong set of brands, growth businesses like B2B, its e-commerce marketplace open to third-party vendors, and a commitment to returning capital to shareholders through buybacks and dividends makes the stock a good bet, no matter what happens with the economy in 2023.
At a P/E of just 7 and a dividend yield of 2.7%, Williams-Sonoma looks significantly undervalued, and it looks well positioned to recoup some, if not all, of its recent losses this year.
NYSE: SIX
Key Data Points
Six Flags: Off 47% from its 52-week high
John Ballard (Six Flags Entertainment): Six Flags is a promising turnaround situation that could net investors a handsome return over the next few years.
Six Flags is the largest operator of theme parks in North America. It operates 27 parks and water parks, with two in Mexico and one in Montreal, Canada.
Theme parks can be a profitable business, if managed properly, and Six Flags has not been profitable in recent years. CEO Selim Bassoul took over in 2021 to correct previous mistakes by management, including a bloated cost structure, selling tickets at deep discounts that led to deteriorating profitability, and overcrowded parks.
These are easy problems to fix, and Bassoul is the right one to fix them. From 2001 through 2019, Bassoul was the CEO of Middleby, a maker of restaurant cooking hardware. A $1,000 investment in Middleby stock in 2001 was worth $138,000 by the time Bassoul retired in 2019. He delivered those returns by focusing on profitable growth, and he's aiming to do just that at Six Flags.
The errors by previous management give Bassoul a clear roadmap to turn the business around. The first step is to stop discounting ticket prices. This will cause some pain in the near term, as regular attendees at the parks might be turned off by Six Flags' perceived greed. Not surprisingly, attendance was down 33% year over year in the third quarter, but these are the right moves to stop the bleeding on the bottom line.
One metric that shows progress is that per-capita spending year to date through September was up nearly 50% compared to 2019. Management also reported that season pass sales are running at 89% of 2019 levels through the first month of the fourth quarter.
Six Flags should be able to turn a healthy profit margin soon enough. The company generated as much as $241 million of free cash flow within the last three years, yet its current market cap currently sits at just over $2 billion. That's an incredible bargain to invest alongside a CEO who clearly knows what he's doing.
