There's no better time to put your money to work than when stocks are in the tank. Pessimism over the economy can lead to significant undervaluation of the best businesses, and that means lucrative investing opportunities for patient investors.
After the sharp sell-off last year, the S&P 500 index has rebounded about 8% year to date, but there are still many top names that have significant upside, according to Wall Street analysts.
Three Motley Fool contributors found three stocks, where analysts have set price targets well above their current quote. Here's why Wayfair (W 0.01%), Deckers Outdoor (DECK 1.61%), and Warner Bros. Discovery (WBD 0.50%) could deliver great returns.
Wayfair stock: 146% upside
Jennifer Saibil (Wayfair): Wayfair stock lost 82% of its value in 2022, outdoing many plummeting stocks. However, it's up a whopping 53% so far in 2023, and a company turnaround is already happening.
Wayfair sales skyrocketed at the beginning of the pandemic. Shoppers focusing on home improvement while stuck indoors scooped up Wayfair's trendy and moderately priced furniture and home products, and the company posted a profit for the first time.
However, that changed drastically in the aftermath. Sales plunged, and net loss is back where it was before.
W Revenue (Quarterly) data by YCharts
However, the company's model is still intact, and the long-term opportunity looks compelling. It operates under several banners, such as Wayfair and Perigold, that range from midprice through luxury, giving it exposure to a large part of the population. It works through a dropship model, which means that it provides a platform for third-party sellers to feature their products.
For the most part, it does not need to hold inventory, and it only "buys" products when it records its own sale. However, many of its suppliers use Wayfair's delivery systems, giving it more control over the process. That should ultimately provide it with a way to become very profitable, although it took two steps back last year.
However, the steps it is taking to build relationships are bearing fruit. Despite the decline in customer count and revenue, active customers continue to engage. In the 2022 third quarter, average order value increased from $285 in 2021 to $325, and revenue per active customer increased 13% to $547 for the trailing 12 months.
In January, investors enthusiastically greeted the news that Wayfair would be cutting 10% of its workforce. That was an addition to a cost-reduction plan launched in August to save $1.4 billion annually and break even in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023.
Wayfair stock trades at the incredibly low price-to-sales ratio of 0.4. Risk-averse investors may want to wait on Wayfair right now, but the likelihood of a comeback looks strong, and the long-term opportunity is exciting.
Deckers Outdoor stock: 29% upside
Jeremy Bowman (Deckers): Deckers, the diversified footwear company, may be best known for Uggs, the sheepskin boots that were all the rage a decade ago, but lately there's another shoe that's been driving the company's performance: its Hoka running sneakers.
The success of Hoka has helped make Deckers a big winner on the market over the last year during a tough period for consumer discretionary stocks, as shares of the footwear maker have nearly doubled from their lows last spring.
In its most recent earnings report, sales of Hokas nearly doubled, jumping 90.8% to $352.1 million, which could portend further growth for the running shoe. Hoka still trails Ugg as the company's biggest brand, but that could change if the current momentum continues, and Wall Street seems to be taking notice.
UBS analyst Jay Sole raised his price target on the stock from $530 to $540 following the company's recent earnings report, calling Hoka "one of the fastest-growing footwear brands in the world." Sole suggested that the stock was undervalued, given its ability to gain market share during a difficult macro environment.
Sole's price target implies a 29% upside in the stock, and given Deckers' momentum since the spring, the stock seems like a good bet to get there, especially given the buzz around Hoka, which is penetrating a large addressable market in running and casual/comfort sneakers.
The company just reported its fiscal third quarter and raised its guidance for the fiscal year to call for 11% to 12% revenue growth. If it can maintain that momentum into fiscal 2024, the stock should continue to be a winner.
Warner Bros. Discovery stock: 40% upside
John Ballard (Warner Bros. Discovery): Streaming has come a long way over the last decade, but top media companies still have a lot of work to do to catch Netflix.
One stock to keep an eye on is Warner Bros. Discovery. This top media stock fell hard last year with the broader market, but investors shouldn't discount the growth potential of the iconic film studio. Bank of America analyst Jessica Reif has a buy rating on the stock with a $21 price target, representing 40% upside from the current share price.
The company has an attractive collection of media properties that the market is underestimating at these low share prices. The company was created from the merger of AT&T's WarnerMedia and Discovery in April 2022, which brought together several top cable networks, in addition to HBO and Warner Bros. Pictures, all under one corporate roof.
The stock is down mostly due to uncertainty around the near-term advertising market, as well as the slowing growth in streaming coming out of the pandemic. These headwinds have weighed heavily on the company's revenue growth, which fell 5% year over year on an adjusted basis in the third quarter.
Management is implementing a plan to realize at least $3.5 billion in synergies beyond 2024. This should significantly improve earnings and free cash flow. This is why Bank of America calls Warner Bros. the "best value in media."
The direct-to-consumer business added 2.8 million subscribers last quarter, bringing the total to nearly 95 million. There's growing demand for streaming, and Warner Bros. has the content to create long-term value for shareholders.
With the stock currently trading around 12 times management's 2022 free cash flow guidance, investors are getting a steal.
