The stock market remains volatile, and investors are tasked with weighing potential opportunities created by sell-offs against macroeconomic and business-specific risk factors. With the market's near-term outlook characterized by uncertainty, investors may want to take a measured approach to stock buying right now, but some companies that have seen big valuation pullbacks could bounce back to deliver incredible returns.
If you're on the hunt for worthwhile investments, here's a look at two very different companies in the industrials sector, trading down more than 50% from their respective valuation peaks.
This risky EV battery stock could pop
Keith Noonan: If you're looking to balance safer portfolio plays with some stocks that have explosive upside potential or just have high risk tolerance, I think QuantumScape (QS 5.69%) deserves consideration right now.
QuantumScape is a leading developer of solid-state lithium batteries, and its technologies could eventually power substantial leaps forward for electric vehicles (EVs) and consumer electronics. No doubt about it, QuantumScape is a speculative investment, and it's not surprising that the stock has struggled, given that the macro backdrop has been unfavorable for growth stocks lately.
The business remains in a pre-revenue state, which means it's not actually generating any sales right now -- let alone earnings. More accurately, the company has continued to record losses as it develops and tests prototypes in order to move closer toward commercial releases. But it looks like QuantumScape could have a commercial product ready for the market within the next year or so, and shares could be worth buying for risk-tolerant investors ahead of this move.
While QuantumScape has seen an approximately 95% pullback from its peak level, it's not like the battery specialist's market opportunities and outlook have been completely derailed. The company has continued testing prototypes with automotive partners, and the results have generally been encouraging. Most current EVs would require roughly 30 minutes to complete fast charging from 10% to 80% and incur significant battery degradation through repeated use, but QuantumScape's prototypes are capable of completing that fast-charging benchmark in just 15 minutes and limit the long-term decline in battery capacity.
QuantumScape's battery technologies have the potential to improve EV safety, significantly reduce charging times, and lengthen vehicle life cycles. It's hardly a sure thing that the company will deliver on its revolutionary potential, but betting on breakthroughs in EV battery tech could have big payoffs.
3M's legal risk might already be priced into the stock
Parkev Tatevosian: 3M (MMM 0.46%) stock is down 52% off its high in recent years and might be an excellent stock to buy right now. The company has a long history of running the business effectively with solid profit margins. Admittedly, 3M may not be suitable for investors looking for a growth stock, but for those looking for a solid business at a reasonable valuation, the company could be an option.
Still, 3M has increased revenue from $29.9 billion in 2012 to $34.2 billion in 2022. That may not be exciting for growth stock investors, but it was enough to expand earnings per share. Indeed, in the same period mentioned, 3M's EPS increased from $6.32 to $10.18.
Businesses with a greater percentage of fixed expenses than overall expenses can leverage revenue more powerfully. To put it more simply, sales increase while expenses stay relatively flat.
MMM PE Ratio data by YCharts
That said, 3M faces legal issues that could cost the company dearly. The company is facing lawsuits alleging harmful and deceptive practices used by its chemicals business and that its earplugs for military use were defective. It could be one reason that explains why 3M's stock is down so significantly off its highs.
I will argue, however, that most of that risk is now accounted for in 3M's depressed stock price. The stock is trading at a price-to-earnings ratio of 11, the lowest it has sold for according to this metric in the last decade.
Two very different companies that could be worthwhile buys
When it comes to their respective businesses and valuation profiles, 3M and QuantumScape could hardly be more different.
3M could face significant setbacks stemming from lawsuits, but the company's core businesses continue to look strong, and its price-to-earnings multiples have been pushed down to levels that look low on a historical basis. Meanwhile, QuantumScape has yet to actually bring a product to market and is a highly speculative investment, but the battery-tech innovator could be on the verge of huge breakthroughs.
Because of their different risk and valuation profiles, owning both stocks won't be the right play for every investor, but buying a combination of growth stocks and value stocks can be a way to balance portfolio risk and still leave room to see big returns.
