A double-digit percentage rally in the S&P 500 this year has made it more difficult for investors to find screaming bargains. That challenge is tougher still given that consumers and businesses are becoming more cautious about their spending lately.
These short-term growth worries have helped push share prices lower for both Ulta Beauty (ULTA -0.40%) and Etsy (ETSY 0.34%), two successful businesses with attractive earnings prospects. Let's look at a few reasons why investors might want to add these stocks to their portfolios right now.
Ulta Beauty has that look
Ulta Beauty's late May earnings update was packed with good news about the business. The beauty and spa products specialist reported a blazing 11% increase in customer traffic, which contributed to a 9% boost in comparable-store sales.
But investors chose instead to focus on the fact that its industry is becoming more promotional. Rivals are increasingly cutting prices, and Ulta Beauty had to respond in kind. This pressured its profit margins, which fell to 17% of sales through late April compared to 19% in the prior-year period.
ULTA Operating Margin (TTM) data by YCharts.
That industrywide swing is no reason to abandon Ulta Beauty's stock, however. The retailer is winning market share and remains far more profitable than it was before the pandemic. Management has also taken a cautious approach to store expansion, which has left it with plenty of resources to continue investing in the business. These positive factors should drive excellent shareholder returns over the long term.
Etsy's sell-off was overdone
Some of the recent Etsy stock sell-off makes sense. Its growth rates have slowed considerably since early 2022, after all, as consumers have reverted to more normal e-commerce spending patterns. Etsy handled $3.1 billion of transactions through its platform in early 2023, down 3% after adjusting for shifting foreign currency exchange rates.
But Etsy's business is still in great shape. The company returned to growth in its buyer pool last quarter and was solidly profitable. Operating cash flow held steady at $56 million, and the company has over $1 billion in cash and equivalents on the books. Overall sales rose by 11% as its seller fee income jumped following its recent price increase.
Shareholders are hoping that Etsy can keep increasing these fees over time as it provides better services to sellers. It is planning a busy 2023 on this score, with dozens of improvements on the way, including more useful search results, curated shopping lists, and AI-powered recommendations.
Wall Street, however, seems more focused on the short-term sales challenges Etsy will face. The consensus estimate among Wall Street pros is that revenue will only rise by about 8% this year, a slowdown from last year's 10% increase.
Cautious investors might want to keep this stock on their watch lists for the next few quarters to see if we get more concrete signs that Etsy has returned to sustainable growth in areas like its buyer pool and overall transaction volumes. But you are likely to be rewarded for taking on a bit more risk by investing today, as shares have dropped nearly 20% since the start of 2023. This sell-off seems like an overreaction given Etsy's strong financial position and its attractive long-term growth outlook.
