While some corners of the market have surged this year and become rather expensive in the process, other stocks have been left behind. Pinpointing these investments is crucial, as it allows you to avoid getting caught up in hype cycles that can result in significant losses in a portfolio.
Two cheap stocks that could rebound if the broad market continues to gain steam are Etsy (ETSY 0.34%) and MercadoLibre (MELI 3.09%). Read on to find out why these two stocks are attractive buys.
Etsy
Etsy is the primary marketplace to go to if you're looking for custom and handmade goods. The products on its website support millions of individual sellers around the world, and many of these items would only be typically found locally in mom-and-pop shops.
Etsy saw an explosion of growth during 2020 and 2021, but it hasn't seen much after pandemic-fueled demand faded.
Data by YCharts. YoY = year over year; TTM = trailing 12 months.
Now, Etsy has to find new ways to increase its revenue. In April 2022, it raised its sellers fee from 5% to 6.5% but also spent some of that increase on the rollout of Etsy Ads. But that's a one-time catalyst, and the business may be running short on time to prove it can drive meaningful growth.
In the first quarter, Etsy's gross merchandise sales (GMS) fell nearly 5% year over year, indicating some shrinkage of the platform. For the second quarter, management guided for GMS between $2.85 billion and $3.10 billion, or a decline of 6% at the bottom end or growth of 2% at the top. And second-quarter GMS in 2022 and 2021 was $3.03 billion and $3.04 billion, respectively, so Etsy has been stuck in a rut for nearly two years.
Furthermore, Etsy recently sold Elo7 -- the Brazilian counterpart to its regular business that it acquired for $217 million in 2021 -- for an undisclosed amount. It likely took a significant bath on the investment as the sale follows a $1.0 billion writedown on its combined Elo7 and Depop acquisitions earlier this year.
So why could Etsy skyrocket going forward if it seems to be struggling right now? It all comes down to valuation. The stock hasn't been this cheap in a long time.
Data by YCharts; PS = price to sales.
It has improved its margins since 2018 too, the last time shares were this cheap, which should come with a higher valuation as it has greater profit potential. The stock also trades for 22 times forward earnings, which is reasonable for an undisputed leader in its industry niche.
So once consumers feel the freedom to spend more of their discretionary income, Etsy should see some recovery, even though the stock is priced for the worst-case scenario. This is reflected in Wall Street's view of the stock as the average of 26 analysts' price targets is $112.50, 21% higher than current prices.
While Etsy faces some headwinds, there is room for upside if the company can deliver any snippet of positive news.
MercadoLibre
On the flip side of Etsy is MercadoLibre (MELI 3.09%), the Latin American commerce giant. While Etsy is struggling to grow, MercadoLibre is growing at a blistering pace.
In the first quarter, revenue increased 58% on a currency-neutral basis. This was pretty even across MercadoLibre's two divisions: commerce (up 54%) and fintech (up 64%). It's also becoming more profitable, as the operating margin rose from 6.2% in the first quarter of 2022 to 11.2% this year.
The good times are expected to continue, as Wall Street analysts expect 85% earnings growth in full-year 2023 and 39% growth the following year.
Still, the stock gets no respect and currently trades at levels not seen since the depths of the Great Recession in 2009.
Data by YCharts.
With that much of a discount on the stock relative to its historical valuation, it's a no-brainer buy, especially given its impressive track record. Should MercadoLibre get even close to its 10-year average valuation of 11 times sales, then the stock could see a strong rally based on valuation alone.
Throw in a market-leading, high-growth business in a region seeing strong expansion, and you have a recipe for a stock that can skyrocket once the market finally wakes up to it. Investors should get into MercadoLibre now as the returns could be explosive.
