This year has provided a rebound for investors, with the S&P 500 up nearly 9% so far in 2023. However, just because the overall market is up, that doesn't mean every public company is replicating those returns.
Here are two market-trailing stocks that look absurdly cheap right now.
1. Dutch Bros
Coffee is a product that will always be in demand, so any coffee chain is worth a look as an investment. The fast-growing business Dutch Bros (BROS 1.19%) is trying to follow the path Starbucks paved with one variation: It operates drive-thru coffee shops only.
The company is prioritizing expansion, having opened 133 of its 671 locations, for 25% growth, in 2022. That focus increased its net sales from roughly $497 million to $739 million, or 49%, during the same period. And management expects to open at least 150 new locations in 2023.
Despite Dutch Bros' increased footprint and sales, its stock is down roughly 42% over the past year and nearly 60% from its all-time high in 2021.
NYSE: BROS
Key Data Points
The stock has struggled because amid high interest rates, investors typically shun companies that aren't profitable because of the increased likelihood these businesses will need to borrow money, which will come at a higher cost. Dutch Bros falls into that category, with a net loss of $19 million in 2022, $4.7 million of which was attributable to the core business.
It had $191 million in net debt at the end of 2022, with $39 million of that added in the fourth quarter. So, as the company continues with its scaling ambitions, management will likely have to weigh how much new debt it can add in the name of growth. Chief Financial Officer Charley Jemley recently said the company's goal is to be debt-free by the end of the decade, but countless risk factors could change between now and then to thwart that objective.
Image source: Getty Images.
Investors typically turn to another metric to value a growth stock like Dutch Bros: the price-to-sales (P/S) ratio. This is calculated by dividing a company's market capitalization by its annual sales. The coffee chain trades at a P/S ratio of about 2.1, close to an all-time low for the company since its initial public offering (IPO) in late 2021.
Today, the stock price is around $30, roughly 30% above its IPO of $23, but as stated previously, annual sales have increased an impressive 49% since then.
If Dutch Bros can keep its debt in check while continuing to scale its business effectively, its stock should wake up soon.
2. Sherwin-Williams
Amid a slowing housing market, Sherwin-Williams (SHW 2.30%), a leading paint and coating manufacturer, has seen its stock drop nearly 20% from its 52-week high of $285. The reason might have more to do with uncertainty around the housing market than the 157-year-old company's underlying financials.
That's because in 2022, even as housing sales declined, Sherwin-Williams posted revenue of $22.15 billion and diluted net income per share of $7.72, both of which were record figures.
NYSE: SHW
Key Data Points
Another measure of Sherwin-Williams' stability is that it's a longtime dividend payer, having raised its payout annually for 44 consecutive years. The quarterly dividend of $0.605 per share currently yields about 1.05%.
The dividend might have also been a source of anxiety for some investors because management only raised it by 0.8%, from $2.40 per share to $2.42. For comparison, it was raised by 23.5% in 2021 and 9% in 2022. This most-recent increase, along with disappointing sales guidance and diluted net income per share, was a clear signal that management feels less confident about its outlook in 2023.
Regarding valuation, the stock trades at a price-to-earnings (P/E) ratio of about 29. That is near its three-year low and well below its five-year average of nearly 34.
So despite some housing market risks, Sherwin-Williams stock appears on sale and is well positioned as the market leader in paints and coatings to continue its impressive dividend streak for years to come.
Are these two struggling stocks buys?
Anytime a stock is down, especially against the overall market returns, there tends to be a reason. Investors must determine whether or not the cause is a short-term catalyst or a long-term trend. If it's the former, investors have a buying opportunity for a quality business trading at a temporary discount.
These two stocks have proven business models unlikely to be disrupted anytime soon, even with healthy competition. That makes both of them worthy of any portfolio at significant discounts.
