With the Nasdaq Composite already up 30% year to date, some analysts and investors are wondering if a new bull market is already underway (definitions on what constitutes a bull market and when it begins vary). The answer will only be clear in hindsight. Whether a new bull market is actually underway or not, there are some compelling bargains available right now that you may regret not buying down the road.
Three Motley Fool contributors recently identified Roku (ROKU -10.29%), Revolve Group (RVLV 1.96%), and Carnival (CCL -0.66%) as three stocks with big return potential in the next bull market. Let's see what these three stocks have going for them.
An incredibly cheap streaming stock
John Ballard (Roku): The leading streaming aggregator saw its share price plunge from its previous highs set nearly two years ago, but Roku stock could soar back almost as quickly as it fell.
Roku is still the undisputed champ in connected TV, but it has given up some share to Apple and Samsung. Apple's obvious advantage is its large installed base of customers who may choose Apple TV to sync content easily across their devices. But Roku's advantage is price. For the price of an Apple TV device, you can buy a whole smart TV powered by Roku's operating system.
Roku was hit hard by a weakened advertising market, which is how it monetizes its platform. But it's well positioned to accelerate revenue when the ad market comes back. In the first quarter, active accounts were up 17% over the year-ago quarter. With nearly 72 million accounts, Roku has a greater installed base to monetize.
Most importantly, the stock is incredibly cheap. On a price-to-sales basis, Roku's 3.3 multiple is a fraction of where it traded when the advertising market was strong a few years ago.
ROKU PS Ratio data by YCharts
Market participants are significantly undervaluing Roku's future profitability. Roku's advertising revenue can churn out a healthy profit margin over time, but what has pressured profits lately are the higher inflationary costs impacting the gross margin of its streaming device sales. As freight and other costs start to ease, Roku should report a healthier gross profit margin, which will boost the bottom line.
The stock has already risen 83% year to date, but it could have much more upside once a bull market is officially underway.
Don't ignore this top AI stock
Jennifer Saibil (Revolve Group): With the S&P 500 back in growth mode, it's already harder to find stock deals in the bargain bin. But there are deals to be found, and Revolve Group is one stock you'll regret not buying in this market.
Revolve Group is a next-gen fashion retailer targeting millennial and Gen Z consumers. It operates an online store that enables shoppers to find and buy multiple brands of clothing, accessories, and shoes. Artificial intelligence (AI) impacts almost every facet of Revolve's operations, but the company uses sophisticated and data-trained algorithms in particular to automate inventory management, set prices, and predict fashion trends.
It has built a fashion-forward business that works with celebrity influencers and pinpoints styles, and since it's all online, it can easily change up its merchandise. It adds around 1,500 products weekly to its websites, which include the eponymous Revolve as well as the high-fashion FWRD, and has about 90,000 products for sale at a given time.
This results in a competitive and profitable business that sold 85% of inventory at full price in 2022. Sales growth was robust over the past few years, but Revolve posted a 1% year-over-year sales decline in the 2023 first quarter, facing tough comps to beat from previous years, combined with inflation. It's maintaining profitability, but earnings per share fell from $0.30 last year to $0.19 this year.
There were so many positives in the report, though. Active customers increased 19% over last year to more than 2.4 million, and average orders placed increased 6% to 2.3. It also generated $48 million in free cash flow.
Investors aren't enthusiastic about Revolve stock right now, and it's down 25% in 2023. At the current price, shares trade at a price-to-earnings ratio of 25 and a forward 1-year price-to-earnings ratio of less than 20.
Management already updated investors in Q1 that sales growth was improving in April, and it's successfully rebalancing inventory to meet current demand. It has also better optimized its fulfillment and return systems, and the second quarter should demonstrate progress.
Long-term, the opportunity looks very exciting, and Revolve stock should soar in a bull market.
Ride the wave
Jeremy Bowman (Carnival): If a new bull market is nearly upon us, then one stock that seems destined to be a winner is Carnival, the world's biggest cruise line.
Demand for cruises is going through the roof right now, a sign that after an extended disruption from the pandemic, the cruise industry is in a bull market, even if the rest of the economy hasn't gotten there yet.
In its first-quarter earnings report, the company reported its highest booking volumes for any quarter in its history, and customer deposits reached a first-quarter record of $5.7 billion, up 16% from 2019 levels.
Carnival isn't in the same financial shape it was before the pandemic. The company had to take on a lot more debt and dilute shareholders to stay afloat while ships were grounded and COVID-19 kept the crowds away, but investors are likely to respond to momentum in the business, and cruisers seem eager to make up for lost time.
Additionally, trends like remote and hybrid work could support increased demand as people have more flexible schedules now.
Though its fixed costs are high, Carnival is the type of business that has a lot of leverage when demand and prices are strong, and that seems to be what's happening now, according to management.
If the economy is truly on the mend, interest rates are stabilizing, and consumer spending remains strong, Carnival looks well positioned to capitalize on a new bull market. Profits could easily soar in the next year or two.
