It's never fun living through a protracted market decline. Watching your account balance fall day after day might be enough to make you want to give up investing altogether. Still, if there's an upside to a down market, it's that bargains often emerge as investors do give up on decent businesses just because their shares have sunk.
When that happens, investors who haven't given up all hope can often leap in and buy shares of growing businesses at discount prices. With the possibility that such deals are starting to emerge, three Motley Fool contributors went looking to find growth stocks available at bargain basement prices. They found Lululemon Athletica (LULU 1.74%), Meta Platforms (META -1.12%), and Albertsons (ACI 1.14%). Read on to find out why and decide for yourself if those companies have the right combination of discount pricing and future prospects to deserve a spot in your portfolio.
Image source: Getty Images.
An investment that fits any investor beautifully
Eric Volkman (Lululemon Athletica): In these sensitive times, when worries about the direction of the economy cloud the stock market, even modest items of bad news can drive a stock's value down sharply. This has happened more than once to athleisure clothing purveyor Lululemon Athletica.
Investors traded out of Lululemon stock in December after the company proffered guidance, within its third-quarter results, that barely met analyst expectations. Never mind the double beat on both the top and bottom lines, or the hefty year-over-year growth rates -- 28% for revenue, and 36% for net income under generally accepted accounting principles (GAAP).
Adding insult to the market's injured psyche, the following month Lululemon caused even greater offense by revising its guidance for fourth-quarter gross margin. It now believes this metric will show a decline of around 1%, as opposed to the original expectation of marginal growth of 0.2% at best. Investor outrage was expressed in another sell-off for the stock.
Yet Lululemon remains the star of athleisurewear, and its considerable growth is a testament to the sturdiness of that position and the still robust demand for such apparel. Americans in particular have become more health conscious this millennium -- hence the continued popularity of yoga and other exercise options.
And no company, not even feisty competitors like Nike or Gap's Athleta, marries the utility of sportswear and the attractiveness of well-designed street clothing better than Lululemon. No wonder it's still the first choice of many consumers.
There's still plenty of room for these yoga pants to expand. The still very U.S.-centric company has vast potential outside of the country, as does the men's clothing segment it hasn't yet targeted intensely. It has a plan in place, the "Power of Three," which seeks to exploit these two opportunities, in addition to pushing digital sales much harder. It's probable that Lululemon's best days, then, are very much in front of it.
A huge user base just waiting to be reached
Parkev Tatevosian (Meta Platforms): One of the positive consequences of the broad stock market decline in 2022 was that it made several excellent growth stocks available for bargain prices. Meta Platforms is arguably the most dominant social media business worldwide. The company has reached 2.9 billion daily active users across its apps. Of course, its services are free to use for consumers; Meta makes money by showing advertisements to folks browsing its platform.
Between 2012 and 2021, Meta grew revenue at a compound annual rate of 41.3%. Meta's massive scale makes it attractive for marketers because they can reach a wide audience on a single platform. That revenue growth has slowed in recent quarters for Meta as Apple's privacy policy changes have made it more difficult for marketers to deliver targeted advertisements.
META PE Ratio data by YCharts
Still, Meta's phenomenal growth over the last decade has come with healthy profit margins. Indeed, between 2012 and 2021, Meta's operating profit margin averaged 38.8%. The business model is lucrative and challenging to replicate after Meta has attracted billions of daily active users. Meanwhile, the headwinds presented by Apple's privacy policy changes have Meta trading at a price to earnings ratio of 12.73, near the cheapest it has sold according to this metric in five years.
Heads you win, tails you're not likely to lose much
Chuck Saletta (Albertsons): Grocery store chains don't normally come to mind as the top picks of growth-oriented investors. Albertsons, however, offers a special circumstance at the moment where its shares are available at a clear discount due to uncertainty surrounding its future.
Back in October, Albertsons agreed to get bought out for $34.10 per share, less a $6.85 special dividend that has gone ex-dividend and now looks cleared to actually get paid to shareholders. That works out to around $27.25 per share for current investors.
Of course, there's an added wrinkle that some Albertsons stores may need to be spun off to a separate holding company to appease regulators. Even if that happens, existing shareholders will probably keep those stores in the spinoff as the rest of the chain is acquired, keeping the total value close to whole.
Despite having that purchase agreement in hand, Albertsons' shares recently traded at $20.95 each. That implies a whopping 30% return -- plus a potential for a better than 2% annualized dividend yield -- between now and whenever the merger closes. This suggests the market believes there is very real risk that the merger will be completely blocked.
Yet even if the merger does get blocked, Albertsons recently traded hands at around 7.5 times its anticipated next-year earnings as an independent company. Along with that bargain price, the company would be expected to deliver around an 8% annualized earnings growth rate over the next five years if it remained independent. While not the fastest growth on earth, when paired with the low valuation and decent dividend, it provides a path to a solid total return potential if the merger were to fail.
When you consider that this is something of a binary outcome -- either the merger happens or it doesn't -- the uncertainty holding down Albertsons stock seems almost silly. With one outcome, investors are likely to get a one-time boost as the company gets bought out. With the other, they have a solid business with a reasonable growth trajectory available at what looks like a value price.
The market's bargains don't last forever
Regardless of whether you believe Lululemon Athletica, Meta Platforms, or Albertsons provides a sufficient combination of bargain price and growth potential to make one or more of them worth purchasing, now is a great time to start looking for such opportunities. The market's decline has affected many investments, and something is likely out there right now, waiting to be found.
Chances to buy growing businesses at discount prices don't last forever, though. So make today the day you go looking, and you just might find the perfect diamond in the rough that deserves a spot in your portfolio.
