Wall Street is pumping with enthusiasm as it looks like a bull market may be back. Even if it's not technically a bull market yet, the S&P 500 is up 14% this year -- and many stocks are up much more.
Once we get back into a true bull market, it will be much harder to find cheap growth stocks. Increasing prices can get out of hand, and the real value of a stock can get fuzzy. That can lead to a bust, and it's why you should always insist on a reasonable valuation before you buy a stock.
The flip side is that cheap stocks are usually cheap for a reason -- and often come with sizable risk. But if they are truly undervalued, they can lead to incredible gains. Paramount Global (PARA -2.22%) and Wayfair (W 2.08%) are two such stocks trading at dirt-cheap valuations and worth considering now.
1. A media giant with a powerful streaming business
The streaming wars are still being played out among a small group of powerful media companies. Paramount has decades of media leadership with television station CBS, cable channels like MTV and Showtime, and a new streaming business that's competing with the top industry players.
It also has a huge content library including its film production, with hits such as last year's Top Gun: Maverick, and new ones coming out like Transformers: Rise of the Beasts and a new Mission Impossible, expected to be blockbusters this summer. These are notable assets, and they're what make Paramount a significant contender in media and streaming.
Paramount is much smaller than rival Walt Disney, with $32 billion in trailing-12-month revenue versus Disney's $87 billion, but it's similar in size to Netflix, which took in $30 billion over the trailing 12 months.
Since its streaming outfit is smaller than rivals, it's actually posting the highest growth rates -- adding 4.1 million subscribers to the premium Paramount+ in the 2023 first quarter. Revenue increased 65% on top of last year. Its free, ad-supported channel, Pluto, hit 80 million monthly active users in the quarter and is the top global network of its kind.
However, profitability is under pressure. Adjusted operating income before deprecation and amortization (OIBDA), which is similar to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and what Paramount uses as its baseline profitability metric, worsened in the first quarter to a $511 million loss.
Traditional TV is experiencing lower ad spending as advertisers move to streaming and cut down due to inflation. Ad revenue decreased 11% from last year in the first quarter, and OIBDA fell 15%. Film production sales and OIBDA fell as well.
In a bid to get its financials in better order, management cut its dividend from $0.24 per share to $0.05 per share. Previously, Paramount's dividend yielded close to 5%, an especially attractive feature, and one that was likely important in Warren Buffett's decision to buy the stock. At the current price, the forward yield is just 1.28%.
That's both good news and bad news. Paramount needs to cut expenses and invest in its business to stabilize and grow, but cutting the dividend confirms the current state is severe.
Meanwhile, the stock trades at a price-to-sales ratio of only 0.3. Paramount has a huge library of assets that are worth a ton on their own, and the likelihood is that it will get back to growth and profitability. Buying shares at this price presents an incredible opportunity, but it could take a while, or not happen at all, making it a risk to buy now.
2. Wayfair is climbing back up, but it's going to take time
Wayfair owns several popular furniture brands including the eponymous Wayfair as well as upscale labels like Perigold. It fielded extremely high demand at the beginning of the pandemic, posting strong sales growth and increasing profits, but those sales are now declining and it has posted several quarters of net losses.
Sales declined by 7% from last year in the 2023 first quarter, but that's better than the mid-teens drop it was posting last year. The net loss was $355 million, worse than $319 million last year, but an EBITDA loss of $14 million was much improved from $113 million last year.
Wayfair is dealing with extreme pressure from internal and external factors, including building out too much to meet early pandemic demand, facing tough comparable sales measures from that time, and inflation that's taking furniture off many consumer shopping lists. That's a tough uphill battle for any company.
Wayfair still has a large business with many strong qualities, including its heavy investments in a logistics system that gets merchandise to customers quickly, and a dropship model that is theoretically lean and profitable. While the road to get there looks long, it could be doable.
There are positive signs on the horizon. Management expects adjusted EBITDA to be positive in the second quarter, which could be a huge turning point. It released an efficiency strategy last year to cut expenses and double down on operating a customer-focused business to drive loyalty, and it's producing results, although slowly.
At the current price, Wayfair stock trades at only 0.5 times trailing-12-month sales. This could be another huge bargain if you can envision the company turning around -- and if you have an appetite for risk.
