The past several months haven't been particularly fun ones for Williams-Sonoma (WSM -1.34%) shareholders. While up on the order of 14% from December's low, the stock is still down more than 40% from its late 2021 peak. It's also moving lower again right now. Yes, the bear market has been particularly tough on this home decor company.
This stark vulnerability to a bear market has a flip side, though. Williams-Sonoma shares are likely to be hypersensitive to bull markets as well, outpacing marketwide gains when the tide is rising. Assuming we're closer to the beginning of a bull market than not, here are four key reasons to consider stepping into Williams-Sonoma sooner than later.
1. Competitor Bed Bath & Beyond is on the ropes
Rival retailer Bed Bath & Beyond might have narrowly avoided bankruptcy by raising funds via a stock sale last week, but don't be fooled. The company is very much on the defensive and is being forced to shrink just to have a chance at surviving. It's closing or has already closed nearly 150 stores this year and is completely shuttering its Canadian operations.
Regular shoppers of these stores will find somewhere else to spend their money. Presumably, many of them will deem Walmart, Target, and Amazon suitable substitutes. At least a respectably sized swath of these consumers, however, will give home decor and home goods retailer Williams-Sonoma some new business.
2. Premium goods do well when the economy is strong
There's a reason Williams-Sonoma won't win over all of Bed Bath & Beyond's displaced customers: pricing. Although it wouldn't be accurate to peg Williams-Sonoma as a luxury shopping destination, there's no denying its wares are priced at the upper end of most consumers' discretionary shopping budgets.
If the next bull market is rooted in rekindled economic prosperity, however, some consumers will feel confident enough to splurge on premium products at premium prices. Indeed, as evidence of its all-environment resiliency, Williams-Sonoma managed to grow its top and bottom lines in 2020 despite the multiple challenges of the COVID-19 pandemic.
3. Williams-Sonoma shares are dirt cheap right now
As of the latest look, Williams-Sonoma shares are priced at a mere 8.5 times their trailing-12-month per-share earnings and only 7.7 times this year's projected profits. That's about as low a P/E ratio as you'll find among retailers -- or most other businesses, for that matter -- right now.
The old adage warns us that cheap stocks are cheap for a reason, but that reason isn't always a good one. In this case, the ultra-low valuation could have something to do with the current fiscal year's projected pullback in per-share profits, from last year's $16.46 to $14.20. The problem is...well, keep reading.
4. The retailer usually beats earnings estimates anyway
Simply put, the pessimistic outlook for 2023's per-share earnings isn't apt to accurately indicate the sort of profits Williams-Sonoma actually ends up producing.
Take a look at the chart below, which illustrates how the company's bottom line has frequently fared better than analysts' expectations going all the way back to 2018. In many recent cases, the numbers weren't even close.
Data source: Thomson Reuters. Chart by author. Revenue figures are in millions.
Obviously, past performance is no guarantee of future results. On the other hand, a company's past performance is often a great indication of how it's likely to perform in the future. There's no reason to believe Williams-Sonoma can't sustain the growth pace that was seemingly accelerated by the pandemic.
Just remember to be patient
The bullish case might be strong, but that doesn't necessarily mean everyone will see and embrace these four clear reasons to own a piece of Williams-Sonoma before the next bull market begins. The stock could continue bouncing around for a while.
If you're truly a long-term investor, though, this sort of volatility doesn't really matter. Just keep that in mind if you're taking the plunge soon.
