It can be difficult to find great companies selling at truly dirt cheap valuations at the bottom of a market sell-off. Sometimes the best-performing stocks never get truly "cheap" at the bottom. But a stock is not cheap based on how low it trades compared to earnings, sales, or other metrics. What makes it a real bargain is how low the stock price is today versus what the company might be worth in the future.
There are several undervalued growth stocks that could deliver stellar returns off their current share prices. Here's why three Motley Fool contributors believe it's a great time to buy shares of RH (RH -3.37%), Live Nation Entertainment (LYV -1.29%), and Expedia Group (EXPE 0.33%).
Positioning itself for long-term success
Jennifer Saibil (RH): RH is a luxury furniture retailer, but it has also expanded into luxury experiences and sees itself as an " arbiter of taste and design." It has a goal of becoming one of the world's top luxury brands, which is pretty lofty; but it has a strategy to get there, and it's making all the right moves.
It recently rolled out RH-branded yachts, jets, and a guesthouse in addition to several high-end restaurants it already operated to further these ambitions. It has also hired Margaret Russell, who was previously editor-in-chief at Architectural Digest, to direct its media.
That's all in addition to its core business activities of selling fancy furniture through its more than 80 galleries and online portal. In that regard it's also plowing ahead, and in December, it acquired several bespoke ateliers to add more "up" to its upscale products.
After that introduction, it might be surprising to hear that RH is feeling intense pressure in the current macro environment. Sales declined 14% year over year in the 2022 third quarter, and net income slid 46%. Despite the pressure, RH isn't discounting items to fuel sales, but maintaining its premium branding and building it out. Management sees this strategy as essential to its position as a leader in its niche.
As a premium retailer, RH typically has a high full-price sales rate, and that drives a high operating margin. Although the margin has pulled back compared to last year, it's well ahead of where it was before the pandemic, and well ahead of competing retailers, such as Williams-Sonoma, Target, and Wayfair. That's why this strategy looks particularly compelling for RH, and it should bear fruit long-term.
RH Operating Margin (Quarterly) data by YCharts
RH stock made an almost unbelievable jump from the bottom of the 2020 market crash to its highs in the 2021 bull market, gaining 260%. That didn't last as shoppers began to pull back on extras, and it's now down 23% over the past year. At this price, shares trade at the incredibly cheap valuation of 12 times trailing-12-month earnings.
RH is taking a contrarian approach here, but it doesn't look too risky. RH should bounce back and its stock should reward shareholders well into the future.
Experiences are winning consumers' wallets
John Ballard (Live Nation Entertainment): While some of the best growth stocks will never look cheap by traditional valuation standards, Live Nation Entertainment is, indeed, an exceptional business selling for an unjustifiably low multiple to free cash flow.
Live Nation owns Ticketmaster, which helps connect millions of fans with live performances of their favorite artists. Ticketmaster has the fan connections, technology, and streamlined ticket-buying experience that has caused new venues to continuously seek out its services. In addition to selling tickets, Live Nation also owns, operates, has exclusive booking rights, or has an equity interest in several iconic venues, including The House of Blues, The Fillmore in San Francisco, the Hollywood Palladium, and the Ziggo Dome in Amsterdam.
The growth of the company over the last 10 years, including the collapse in revenue when events were shut down during the pandemic, would have turned a $1,000 investment into more than $7,000 even after the stock's haircut last year. With more people choosing to spend money on experiences instead of physical goods, Live Nation is a great stock to consider, especially given its robust growth coming out of the pandemic.
LYV Revenue (TTM) data by YCharts
In the third quarter, Live Nation reported its highest quarterly attendance with over 44 million fans attending 11,000 events. Ticketmaster's fee-bearing gross transacted value rose 62% year over year to over $7 billion -- also a record. Demand for upcoming shows continues to grow. The number of tickets sold for 2023 shows through the third quarter of last year was up by double-digit percentages over the same period in 2021.
The stock sells for just 12.4 times trailing free cash flow, which is a bargain for such a profitable and dominant live event operator.
Travel is back
Jeremy Bowman (Expedia): The travel industry isn't typically thought of as recession-proof. After all, most travel spending is discretionary, and consumers tend to cut back on vacation spending in tough times.
However, 2023 could be different. Online travel agencies like Expedia closed 2022 on a strong note as travelers still seem to be making up for missed opportunities during the pandemic. In the U.S. market, which Expedia primarily serves, the unemployment rate is still near all-time lows, meaning any recession in a traditional sense is still far off.
Online travel stocks like Expedia also don't typically trade at bargain prices, but Expedia, which owns a wide range of brands including VRBO, Hotels.com, and Hotwire in addition to its namesake, is trading at a price-to-earnings ratio of just 11.5 based on earnings estimates for this year.
The company's fourth-quarter earnings report also shows the rebound in the travel sector continues to benefit it.
Expedia finished the fourth quarter and the year with record lodging bookings and revenue, and as CEO Peter Kern said, "Demand was otherwise strong and accelerating, and has been markedly stronger since the start of the year." Kern also said that the company has experienced record app usage and member counts to start the year, and January lodging bookings were up 20%.
The company has several initiatives to drive growth, including new marketing programs, and it's investing more in its loyalty program. Additionally, management has been taking advantage of the beaten-down share price by buying back stock, repurchasing $350 million worth in the fourth quarter, and it seems likely to maintain those repurchases.
With the travel sector still enjoying strong recovery tailwinds, Expedia stock looks mispriced at the current valuation. Investors should take advantage.
