There hasn't been much opportunity for gains in growth stocks over the last year. The tech-heavy Nasdaq Composite and the broader S&P 500 index were both pushed into bear territory, bringing countless growth stocks down with them.
Many hope 2023 will be the year this brutal period will end, but no matter what, a rally is coming eventually. History has shown that bear markets are generally short and are always followed by a bull market. That means investors should be loading up on top growth stocks like Walt Disney (DIS 1.19%) and Target (TGT -1.04%) while these two growth stocks still trade at discounted pricing.
Here's a closer look at each company and why these growth stocks could soar in the next big rally.
1. Walt Disney
If there's one stock that proved resilient during the pandemic it's Disney. This leading media giant and theme park operator executed an impressive comeback after an extremely challenging few years. Visitors to its domestic and international theme parks and cruises are back at pre-pandemic levels and its streaming service Disney+ proved to be quite popular.
In the fourth quarter of 2022, Disney+ saw its highest levels of subscription growth in history. Among its movie studios, its latest box office hit Avatar: The Way of the Water was released in Q4 and is already the fourth-largest-grossing movie of all time.
Despite the company's resiliency and solid earnings, the stock still trades down about 50% from all-time highs thanks to the continued macroeconomic challenges the company faces. Rising interest rates continue to affect its cost of borrowing, high inflation is increasing operational costs, and lingering COVID-19 regulations in China are impacting the performance of its Shanghai resort -- but the company is moving in the right direction.
Disney dedicated itself to aggressive cost-cutting measures that are expected to reduce operational costs by $2.5 billion in 2023, and it believes its streaming service will be fully profitable toward the end of the year assuming economic conditions do not worsen. Its total subscribers for Disney+ exceeded its original five-year goal when the company launched the streaming service in 2019. And visitors at its theme parks and cruises are spending more than before the pandemic, helping give the company a notable bump in revenue while offsetting higher costs due to inflation.
The next few years are ripe with growth opportunities for the company as it continues to build on its profitability across its network of streaming services (Hulu, ESPN+, Disney+) and create more box office hits from its various film studios (Marvel, Lucasfilm, 21st Century Fox, Pixar, Disney). It also has theme parks, content licensing, and product sales to insulate its earnings.
2. Target
Target, like most other big-box retailers, faces a slew of challenges since the onset of the pandemic. Supply chain issues and a shopping boom at the start of 2020 prompted retailers to increase their back stock of products to keep pace with demand. However, things didn't materialize as expected. Consumer interest in shopping slowed and left Target with too much inventory.
High inventory levels force retailers to cut prices in order to move the product and give shelf space to more seasonal or profitable products, which eats into earnings. There's also the challenge of high inflation increasing the company's operational expenses and narrowing its profit margin.
The last few earnings reports looked pretty bleak for Target's shareholders. Operating margin continues to drop, now at 23.6% compared to 28.9% at the end of 2019, and net earnings were down 60% from last year. But things are finally looking up for the company. Target already unloaded a lot of its inventory backlog, freeing up space and capital for more profitable products, and it expects its inventory problem to improve fully in 2023. It also expects a positive increase in its operating margin.
TGT PE Ratio (Forward) data by YCharts
Sales have increased steadily for the company over the last few years, so there's clearly a growing demand for Target's products. It's simply a matter of moving toward better profitability and better macroeconomic conditions for growth. The stock currently trades around 19 times its forward earnings per share, which is the lowest price-to-earnings ratio of its big-box peers. Its improving inventory position and high demand make this stock a fantastic growth stock to buy before the next big rally.
