By some accounts, the stock market is already in rebound mode. Since bottoming out back in October, the S&P 500 index has jumped about 20%. Still, the index remains slightly more than 10% below its all-time high. And I continue to see fear from many investors when it comes to picking and buying stocks.
That fear is driving some stocks to historically low valuations. This includes Ulta Beauty (ULTA -0.40%), MercadoLibre (MELI 3.09%), and The Lovesac Company (LOVE -0.05%).
When valuations are low and business is good, this suggests that investors are timidly waiting out uncertainty. Doubts should give way to greater confidence when the market rebound fully takes hold. And that's why I believe this trio could lead the market rebound higher.
1. Ulta Beauty
As of this writing, Ulta Beauty stock is down more than 23% from its all-time high. And it trades at just 17 times its trailing earnings. For perspective, this is cheaper than its long-term historical average valuation. It's also cheaper than the average valuation for the S&P 500, which is why now is a compelling time to give the stock a look:
ULTA PE Ratio data by YCharts
Ulta Beauty is well positioned to take advantage of the resilient cosmetics and beauty space. The company has over 1,350 locations, and these stores have a greater purpose than just product sales. Its customers also enjoy salon services, which not all competitors offer. Therefore, this is a competitive advantage for this business.
It's also worth remembering how loyal Ulta Beauty's customers are. It ended 2022 with 40 million loyalty members, up from just 31 million in 2020. Loyalty members accounted for 95% of its total sales.
Ulta Beauty stock is down from its highs right now because investors are worried about how management recently lowered its operating margin guidance. However, it's still guiding for a full-year operating margin of at least 14.5%, which is quite good.
From 2018 through 2022, Ulta Beauty earned over $5.4 billion in cumulative operating income. And most of it came back to shareholders via share repurchases -- $3.8 billion over the same period.
I believe Ulta Beauty has enough loyal members for its business to continue to do well. Its operating margin is still strong. And much of that operating income will be given back to shareholders. All that could make this a great stock to add to a diversified portfolio right now.
2. MercadoLibre
Down 39% from their high, shares of MercadoLibre have fallen more than those of Ulta Beauty. And perhaps that's appropriate. As a huge e-commerce, shipments, and financial technology (fintech) player in Latin America, MercadoLibre is exposed to geopolitical uncertainties and currency fluctuations, which feels scarier than just a revision to guidance for operating margin.
That said, MercadoLibre has cracked some very hard nuts in its core markets, and I believe it's poised to reap the benefits now and for years to come.
In a region where many people are bankless, MercadoLibre's fintech platform is fast-growing, with 44.5 million active users as of the first quarter of 2023. Additionally, shipping logistics in Latin America have historically been a challenge. But 77% of MercadoLibre's Q1 shipments were delivered in under 48 hours, making it the fastest logistics provider in its markets.
Since it solved problems regarding fintech and shipping, MercadoLibre's marketplace business is thriving, and now has over 100 million active users. With these deep moats surrounding its castle, it's hard to imagine MercadoLibre getting disrupted anytime soon.
Now the company appears to be transitioning from a season of financial investment to harvesting a financial reward. In the first quarter, MercadoLibre had record earnings before interest and taxes (EBIT) of $340 million, and its net margin of 6.6% hit a five-year high:
MELI Profit Margin (Quarterly) data by YCharts.
With its shares trading at a historically low valuation of 5 times its trailing sales, and its business hitting new records, now is a good time to invest in MercadoLibre.
3. The Lovesac Company
I get the trepidation about Lovesac -- it's a business that doesn't sound like a market-beating idea. The company got its start by selling oversized beanbag-style chairs. More recently, its sectional couches have stolen the show.
This might sound like a small, mundane business opportunity. But Lovesac's business is absolutely booming and its stock is dirt cheap -- something that not even the skeptic in me can ignore.
Occupying the high end of the furniture space, Lovesac enjoys luxurious profit margins -- in its fiscal 2023 (which ended in January) the company had a gross margin of 53% and a net margin of 4%, not bad for a company this small.
However, companies at the high end of the market have an intrinsic problem: Even the biggest fans of your brand are unlikely to make frequent purchases. After all, you don't need to replace a quality couch very often.
Lovesac has smartly figured out a way around the problem. Everything it makes is backwards-compatible. Lovesac owners can change their color scheme with new covers; they can add on to old purchases with new sections or accessories; and they can even buy a major tech upgrade by getting Lovesac's new StealthTech surround sound.
The numbers speak for themselves: Revenue is consistently tracking higher and the business regularly turns out a profit. And with higher sales, profits, and zero debt, it's really hard for Lovesac to lose.
Its shares trade at just 11 times forward earnings, and you won't find many quality companies trading this cheap. Indeed, Lovesac is the cheapest of these three stocks by a long shot from a forward earnings perspective:
LOVE PE Ratio (Forward) data by YCharts.
I imagine that as long as uncertainty and fear are running high, shares of Ulta Beauty, MercadoLibre, and Lovesac will continue trading at low valuation multiples, providing investors with an opportunity to pick up shares for the long haul. However, considering these three are quality businesses, I also expect valuations to increase when investors become more confident during the next market rally. So these good deals probably won't last.
