In a cycle of investor enthusiasm, the S&P 500 is up nearly 15% so far this year. As investor sentiment improves, the market keeps rising.
One of the ironies of investing is that many investors get scared during bear markets and pull their money out, even though it's precisely at those times that you'll find the best deals to optimize your investments. Then they get excited during bull markets, but often miss the right time to buy.
When buying all-weather stocks, picking your moment is not such a problem, because you can expect them to gain over the long term. But when investors buy hyped-up stocks with high valuations, they're setting their portfolios up to take a fall.
Right now we're in an in-between zone where investors are becoming more confident, but we may not have quite exited the bear market. You can still find good deals, but many stocks already look expensive. Given where we are now, I'm going to recommend Roku (ROKU -10.29%), Dutch Bros (BROS -1.04%), and RH (RH 2.28%) as stocks that you can buy right now with $1,000 and that could make you a fortune over the long haul.
1. Roku: a different kind of streaming stock
The streaming video wars are in full swing. Almost every streaming company is feeling pressure right now as the market became quickly saturated in the wake of the pandemic. There just aren't enough eyeballs for every company to continue posting high subscriber growth. At this point, some companies may get bought out, others are consolidating, and the rest are duking it out while attempting to figure out the right formula to generate growth.
Roku's model is different from the rest in several ways, and this gives it an edge in a market full of companies all trying to compete solely with new and better content. First of all, it makes hardware. Its device business is the smaller of its two segments, but its platform segment includes the most popular streaming operating system in the U.S., and remaining a diversified business with a top-level hardware segment is an excellent way to maintain its competitive lead.
Moreover, that platform business, which is more similar to other streamers, is also diversified. Roku has relationships with other streamers that show their content on its players, and it more recently began to create its own content, Roku Originals, on The Roku Channel. That was one of the original free, ad-supported video-on-demand services, and it continues to attract viewers to its network. Active accounts increased by 1.6 million from Q4 2022 to Q1 2023, and by 17% year over year. Streaming hours increased 20% over last year, and this has all been going on as the industry leaders have raced to launch their own ad-supported channels, which aren't even free.
That doesn't mean everything is perfect for Roku right now. Although device revenue increased 18% year over year in the first quarter -- a reverse from several quarters of declines -- platform revenue actually decreased for the first time since Roku went public, by 1%. Although advertisers are moving more of their money toward streaming, they're also concerned about how inflation and higher interest rates are impacting customers, and cutting down on their marketing spending in consequence. Roku is also back to posting net losses since its period of staggering pandemic-driven growth has come to an end. But it's now well positioned to grow at a steady rate when the economy improves and to move more carefully toward profitability.
Roku stock is down 14% over the past year and trades at a very reasonable 3 times sales, making now a great time to lock in a cheap price.
2. Dutch Bros: a different kind of coffee chain
Dutch Bros has a unique coffee culture that sets it apart from local shops and large chains like Starbucks. It's very popular with its constituents, which is the main reason to be confident about its prospects. Companies that sell products people like tend to grow. When it's something like a cup of coffee, customers feel like they can afford these inexpensive luxuries, and Dutch Bros has a wide open market with the mass appeal of its affordable everyday luxury.
The second reason to believe a company can thrive is if, once it has a winning concept, it can operate efficiently and turn the concept into a profitable business. Dutch Bros is making this happen as well, but near-term headwinds are hiding some of the impact.
Right now, it's posting impressive double-digit-percentage sales growth, but all of the growth is coming from the opening of new stores. Revenue increased 30% year over year in the first quarter to $197 million, but comparable sales (comps) were down 2%.
On the one hand, it's a strong sign that it's able to open up so many stores successfully, in both new and old markets. On the other hand, the fact that its comps aren't growing is reason for investors to be cautious.
However, it looks like the headwinds holding comps down are external factors related to the state of the economy. Lots of top companies are dealing with the same issues. When economic growth picks up speed again, comps growth should return. But at that point, we can expect the stock price will rise, and you'll lose the opportunity to buy shares at their currently cheap levels. Shares are down 16% over the past year and are trading at less than 2 times sales.
There's definitely risk here since much of this company's story is unknown. But that's why I'd go back to the heart of the story, which is that customers love Dutch Bros' stores and beverages. Investors with some risk tolerance may feel like that's enough to mitigate the risk.
3. RH: a different approach to home furnishings
This is a contrarian call since RH is struggling right now. The purveyor of high-end furniture, which had a robust rebound from its pandemic decreases, is on the decline once again.
It's not surprising that RH's model isn't getting as much energy in the current economic environment. The company sells to an upscale crowd, but these types of expensive, non-essential goods are what people are cutting back on right now. RH has some resilience because it targets an affluent market, but customers at the lower end of this clientele are also cutting back. Management said it was making the choice not to discount prices to preserve the premium cachet of its brand, and it was knowingly losing this slice of customers and taking a short-term hit to position itself to grow that much faster long term.
In some ways, that makes a lot of sense, and is a forward-thinking strategy that other companies could learn from. In other ways, RH is taking a gamble, one that many other companies are too scared to try.
Buying RH stock now is buying into the idea that when the economy is thriving again, RH will indeed rebound to better than before.
In the meantime, it's rough going. Revenue dropped 23% year over year in its fiscal 2023 first quarter (which ended April 29), operating margin fell from 21.4% to 13.4%, and earnings per share decreased from $7.22 to $1.76.
Management is staying focused on its goal, which is to become a global luxury brand beyond furniture. It has acquired several new boutique labels for customer exclusivity and launched several RH-branded experiences, including a yacht rental service and a guesthouse service.
Most importantly, it's implementing its expansion further in the U.S. and finally entering Europe. It opened its first European showroom with RH England, making a huge splash onto the scene with a location that includes several upscale restaurants on site.
RH stock is up 15% over the past year, but it still trades at a low valuation of less than 20 times earnings. Prior to the recent sales declines, RH stock was a longtime winner. When it rebounds, it could be an incredible stock to own for the long term, and this is a great entry point.
