Inflation, rising interest rates, and other macro headwinds caused many investors to flee to the safety of T-bills, bonds, CDs, and other fixed-income investments over the past year. Investors who follow that exodus might shield their portfolios from some near-term pain, but they could also miss out on some big long-term gains by blindly shunning all stocks.
So today I'll take a deeper look at three "no-brainer" buys for investors with all levels of risk tolerance: Coca-Cola (KO) for conservative investors, Abercrombie & Fitch (ANF 5.74%) for patient investors who love a good turnaround story, and Stitch Fix (SFIX 0.47%) for speculative and contrarian investors.
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The evergreen play: Coca-Cola
Coca-Cola is a great stock to hold in both bull and bear markets. It sells evergreen beverage brands, generates stable growth, pays an attractive forward yield of 3.1% -- and it's a Dividend King that has raised its payout annually for 61 consecutive years. It generated a total return of more than 360% over the past 20 years.
Coca-Cola has struggled with declining soda consumption rates over the past few decades, but it has diversified its portfolio with more brands of bottled water, tea, juice, sports drinks, energy drinks, coffee, and even alcoholic beverages to offset that slowdown. It's also constantly refreshing its sodas with new flavors, healthier versions, and smaller serving sizes.
Coca-Cola suffered a slowdown in 2020 as restaurants closed down during the pandemic, but its organic sales rose 16% in both 2021 and 2022. It expects its organic sales to grow another 7%-8% in 2023 as its comparable earnings per share (EPS) rise 4%-5%. It also expects free cash flow (FCF) to hold steady year over year at $9.5 billion.
The stock isn't expensive at 23 times forward earnings, and it should easily bounce back from any future market downturns. Coca-Cola might not generate massive gains anytime soon, but it should still be a core holding for long-term investors.
The turnaround play: Abercrombie & Fitch
Abercrombie & Fitch struggled for years as malls closed down and fast fashion retailers disrupted the apparel market. The pandemic further thinned out that struggling sector. But under CEO Fran Horowitz, who took the helm in 2017, A&F has executed a difficult turnaround that gradually stabilized its business.
Under Horowitz, A&F downsized its Abercrombie brand, which faced fierce competition from fast fashion competitors, while expanding its higher-growth Hollister brand (along with Hollister's smaller Gilly Hicks lingerie brand). It also rebooted Abercrombie with fresh marketing campaigns, store renovations, apparel for older shoppers, and e-commerce upgrades.
A&F's net sales declined 14% throughout the pandemic in fiscal 2020 (which ended in January 2021), rose 19% in fiscal 2021 as it reopened its stores, and stayed flat in fiscal 2022 as inflation disrupted its post-pandemic recovery. Hollister's growth also cooled off, and it only partly offset that slowdown with the growth of its rejuvenated Abercrombie banner.
But over the past two quarters, A&F's net sales rose year over year as Abercrombie's double-digit growth offset Hollister's single-digit declines. For the full year, the company expects revenue to rise 2%-4% as it stabilizes Hollister, and for its operating margin to more than double year over year to 5%-6%.
Over the longer term, A&F expects its annual revenue to expand at a compound annual growth rate (CAGR) of 3.5%-5.1% from fiscal 2022 through 2025 as its annual operating margin rises above 10%. A&F still has a reasonable forward multiple of 24, and I believe it could emerge from this downturn as a much stronger company.
The speculative play: Stitch Fix
Stitch Fix delivers five pieces of clothing (which are curated through the results of an online survey) to its customers at a time; customers only pay for the products they want, and ship the rest back for free.
The e-retailer seemed well-positioned to disrupt traditional apparel outlets with that unique business model, and it flourished throughout the pandemic as brick-and-mortar stores closed down. Its revenue rose 11% in fiscal 2020 (which ended in August 2020) and 23% in fiscal 2021.
But in fiscal 2022, revenue fell 1% to $2.1 billion as the pandemic tailwinds dissipated, inflation worsened, and Apple's iOS update made it more difficult to craft targeted ad campaigns. The company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also turned red with a loss of $19 million, compared to a profit of $65 million in fiscal 2021.
Its revenue dropped another 21% year over year in the first nine months of fiscal 2023, but management expects adjusted EBITDA to stay positive for the full year. Those numbers might seem unimpressive, but the company has been aggressively cutting costs ever since its founder Katrina Lake returned as its interim CEO earlier this year.
Stitch Fix's stock also looks dirt cheap at 0.3 times this year's sales, it's heavily shorted, and its insiders actually bought eleven times as many shares as they sold over the past 12 months. Stitch Fix isn't a stock for conservative investors, but it might just be a no-brainer buy if you're looking for an oversold stock that could skyrocket on any positive news.
