What defines a smart investor? While there are probably a number of qualities, I would say two of the most important are: 1) to hold on to stocks when the market's down and, 2) to be open to opportunity when the economy feels bleak.
Even in this bear market, smart investors are finding great deals on stocks with incredible long-term potential. Three that I recommend right now are Dutch Bros (BROS -0.66%), Roku (ROKU -3.05%), and Revolve Group (RVLV 0.42%).
1. Dutch Bros: Huge expansion opportunities
Dutch Bros is a fairly small chain of coffee shops that went public in 2021. It has a different feel than mega-chain Starbucks, with a colorful, feel-good community. It has expanded from over 500 locations two years ago to 716 today, with the goal of opening 150 new stores in 2023.
Stores are located mostly along the West Coast, but management is looking to penetrate new markets with openings in more states. It sees the opportunity for 4,000 stores over the next 10 to 15 years, which is still a drop in the bucket compared with Starbucks' 36,000 stores.
The company has been demonstrating impressive revenue growth, and recently, it's mostly coming from new stores. Comparable-store sales have been negatively impacted by inflation. Dutch Bros successfully combated some of that with price hikes, but it's starting to slow down. In the first quarter, comparable sales decreased 2% from last year.
Management has attributed that to several things. Last year, comps were very high, making it tough to match this year. Only 70% of stores fall into the category of stores counted in the comps group, making it less representative of operational health. And previously, it had explained its fortressing strategy, which involves opening up many stores in a given area to enhance brand awareness, leading to overall higher sales but potentially hurting comparable sales in the short run.
Usually I'm wary of management excuses, but these makes sense, given the overall economic climate. Revenue climbed 30% year over year in the first quarter, a strong showing considering the inflationary environment. It net loss improved from $16.3 million to $9.4 million, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 147% to $23.9 million.
Putting this all into context, Dutch Bros has massive potential to grow store count and sales, as well as return to profitability. Shares are down 25% over the past year and are trading at less than 2 times trailing-12-month sales, which presents a compelling entry point for smart investors.
2. Roku: Where the advertisers are going
Roku is another stock feeling pressure right now, but it has incredible long-term prospects. It's a major player in the streaming wars, but has carved out its own niche to differentiate itself.
First, it has a hardware division it calls the player segment. It manufactures and sell streaming devices at a range of price points, and its operating system accounts for 43% of the market, or more than the next three competitors combined. This is its smaller segment in terms of sales, and it has experienced declines since exploding at the beginning of the pandemic.
Its other segment is what it calls the platform segment, made up mostly of ad sales. Advertising is a huge part of traditional television, but as viewers move over to streaming, advertisers are moving along with them. And as much as this is happening quickly, traditional TV still accounts for most viewing hours, so there's a vast opportunity here.
Ad sales are starting to decline as companies cut their budgets due to inflation, and Roku's platform segment posted declining sales for the first time since the company went public in the first quarter of 2023. Roku still managed a 1% sales increase as player segment sales increased 17% over last year, its first year-over-year increase in several quarters.
There are a lot of moving pieces here, and although Roku became profitable briefly at the height of the pandemic, it's back to net losses as it struggles through economic challenges. However, it's well-positioned to get back to strong growth and soar in better times, which could be just around the corner.
Roku stock is down 39% over the past year, and shares trade at 2.6 times trailing-12-month sales. This makes it a great time to buy the stock.
3. Revolve Group: Not your typical AI stock
Revolve Group sells women's fashion on its two websites, Revolve and FWRD. It has used artificial intelligence (AI) and machine learning for two decades to shape its operations, and the result is a technically sophisticated fashion brand that provides the merchandise its customers are looking for with an efficient, profitable operating model.
That doesn't mean everything is rosy right now. In fact, sales are finally declining as inflation hits everyone's pockets. Sales were down 1% from last year in the 2023 first quarter to $280 million, and net income declined 37% to $14 million. It's still a highly profitable model since Revolve charges premium prices for its high-fashion products.
It wasn't all bad. In fact, there were some excellent indications of customer loyalty in the first quarter, which bode well for when the economy improves. Active customers increased 19% over last year, and total orders placed increased 6%.
In the meantime, management is making moves to maintain efficiency while the external environment presents challenges. It's rebalancing its inventory to meet current market demand, and the spread between inventory growth and sales decline decreased by 50% from last year, which improves the gross margin.
Revolve is in a healthy cash position, with $48 million in free cash flow generated in the first quarter and $238 million in cash on the balance sheet. The company also continues to build up its brand with designer collaborations and improve its services with new technology.
Revolve stock is down 48% over the past year and trades at the low price-to-earnings ratio of 22. That makes sense as net income declines, but it presents an excellent entry point for new investors before net income gets back into growth mode.
