The markets have rebounded sharply this year. The S&P 500 and Nasdaq Composite are up 19% and 34%, respectively, but investors don't have to feel like they have missed the boat. There are still great companies out there selling at discounts that could bounce back soon.
Topgolf Callaway Brands (MODG 0.83%), Revolve Group (RVLV 1.96%), and Target (TGT 0.18%) are trading well off their highs. Let's see why three Motley Fool contributors believe these stocks are still solid long-term investments.
Strong tailwinds behind this classic golf brand
John Ballard (Topgolf Callaway Brands): More people are playing golf these days, and not just on golf courses. This is driving strong growth for Topgolf Callaway Brands, which was formed in 2021 with the merger of leading golf entertainment and tech provider Topgolf International and Callaway Golf.
Callaway has been a top brand in golf clubs and balls for a long time, but the equipment business overall has fallen on hard times lately. The company saw golf equipment sales decline by 5% year over year in the first quarter, but this was more than offset by double-digit growth at Topgolf.
People go to Topgolf's 82 venues to hang out with friends and hit some balls, and business is booming. Topgolf reported revenue growth of 25% year over year in the first quarter on top of strong growth last year, and management sees more room for expansion. It is planning to open an additional 10 venues this year to bring the total footprint to 92.
The growth potential of Topgolf is why the stock looks attractive after falling roughly 49% from its high over the past few years. Investors are clearly concerned about the weakness in golf equipment, but this segment should bounce back when the economy is stronger. The stock was outperforming the S&P 500 in the years leading up to the pandemic, and can likely do it again over the next five years.
You can benefit from a near-sighted market
Jennifer Saibil (Revolve Group): It's not easy to find great stocks at a discount in this market. But some of the best deals right now can be had in retail stocks that are feeling the pinch of inflation. The market can sometimes be shortsighted, and it will price stocks with incredible long-term potential below their long-term value based on short-term performance. That's where Revolve comes in.
Revolve sells premium fashion on its eponymous web site as well as its high-fashion sister site FWRD. But it's not your typical fashion retailer; it focuses on designer brands and charges premium prices for these labels. It's all digital, which cuts out store costs and gives it speed and agility in changing its merchandise selection. It has used artificial intelligence for all of its 20 years of existence to manage inventory, so it's ready for this moment. Finally, it relies heavily on social media and celebrity influencers to connect with and build relationships with its core clientele.
Before the recent inflationary period, it was demonstrating strong momentum with high double-digit percentage sales growth. It has also been profitable since before it went public in 2019. Customers are willing to pay for its premium goods, and it boasted an 85% full-price sales rate in 2022.
The performance hasn't lasted into 2023. Sales growth slowed during the past year, and sales even declined 1% in the 2023 first quarter. It's still profitable, but net income fell 37% in the first quarter to $14 million.
Looking into the future, though, Revolve is poised for a large and sustained comeback. Even now, the number of active customers is increasing, and was up 19% over last year in the first quarter. The connections Revolve is making lead to high engagement and loyalty.
Revolve is also a star in cash generation, and posted $48 million in free cash flow in the first quarter.
Revolve stock is down 31% over the past year, and it could be an incredible asset for your portfolio. You might regret not buying it on the dip.
A winner in the next bull market
Jeremy Bowman (Target): After dazzling investors during the pandemic, Target has looked like something of a lame duck lately.
The retailer's margins and profits have shrunk as it's faced a wide range of headwinds, including a shift from consumer spending away from discretionary goods and toward services; theft, which is expected to cost the company roughly $500 million in losses this year; elevated inflation; and the potential impact from student loan payments restarting.
As a result, Target stock is now down 50% from its peak in 2021, and investors seem to have given up on the shares. It traded sideways during most of the past year before plunging again in May on its most recent earnings report.
However, if we're truly on the verge of a new bull market and the economy is on the rebound, Target seems poised to recover.
Its competitive advantages haven't changed. No other multi-category retailer can match the reach of its store footprint, which covers urban, suburban, and rural areas and in all 50 states, and none of its peers can match its ability to profit from digital sales -- the company uses its stores to fulfill most of its online orders, rather than using separate distribution centers. Again, its store footprint plays a role there.
Target also has a devoted base of customers, who come to the retailer not just for good prices but for its styles and proprietary brands.
The company may not get back to the $13 in earnings per share it reported at its peak during the pandemic anytime soon, but a return to bottom-line growth should be enough to give the stock a significant bounce, as it's well-priced for patient investors after falling by half.
