The stock market is soaring in 2023, with the S&P 500 (^GSPC 1.02%) posting a total return of 17.8% year to date. However, the rising economic tide isn't lifting every boat on Wall Street. Some top-quality companies have been left behind with flat or deeply negative returns over the same period.
You know what they say about buying when there is blood in the street. On the same note, a beat-up stock or two can be great buying opportunities in a rising market.
So let's talk about Walt Disney (DIS -0.04%) and Etsy (ETSY 0.34%) today. They missed the memo about a broad market recovery this year -- perhaps creating two fantastic buying opportunities in the process:
Etsy
Many stocks that soared at the height of the COVID-19 lockdowns of 2020 have taken a beating in recent quarters. Etsy is one of these presumably failed pandemic plays, trading 73% below its all-time highs today.
It's true that the lockdowns accelerated Etsy's business growth in 2020, but that's not the end of the story. The top line never stopped growing, and Etsy's cash profits also stand head and shoulders above their pre-pandemic level:
ETSY Revenue (TTM) data by YCharts
The long downturn includes another deep dip based on last week's second-quarter earnings report. Etsy posted an 82% year-over-year bottom-line jump. Your average analyst had expected shrinking profits instead. But the online marketplace for custom, vintage, and handmade goods saw gross merchandise sales (GMS) merely holding steady over the same period. That was enough to send Etsy's stock to the basement again.
So Etsy's bears had their reasons to give the stock another haircut, but I think they are missing a forest of long-term potential by focusing too deeply on one imperfect tree.
The bottom-line surprise was generated by a 12% increase in the number of sellers on Etsy's marketplace, and the growing group of merchandise suppliers is putting serious money into the platform's premium-priced marketing services. I see several bullish signals in that recent trend:
- Rising interest in premium placement and ad services may be a sign that the online advertising market is getting back on its feet after a deep, inflation-based slump.
- If Etsy can nearly double its earnings in a weak market, imagine what it might do when consumers are willing to open their wallets again.
- Together, these two potential upsides should add up to a tremendous inrush of Etsy orders when the floodgates open.
- Etsy's sellers are learning how to make the marketing services work for them. This high-margin revenue stream is poised to boost both sales and profit margins, with long-lasting effects.
All told, the stock trades at the very reasonable valuation ratios of 29 times earnings, 16 times free cash flows, and 3.8 times sales today. That looks downright cheap, considering Etsy's inspiring growth prospects in a unique and effective e-commerce niche.
Disney
Hollywood is full of land mines right now. The movie and media markets face serious headwinds from the ongoing strikes of the writers' and actors' guilds. At the same time, the macroeconomic trends that weigh on the consumer market as a whole also add pressure in the media market.
Meanwhile, the House of Mouse also struggles with more company-specific problems. Disney's release and production schedules have changed dramatically since Bob Iger's reluctant return to the helm, reflecting the business legend's strategic disagreement with successor and predecessor Bob Chapek. Archrival Comcast (CMCSA 1.85%) is adding another theme park to its Universal Orlando resort, turning up the competitive heat against Walt Disney World. And the company recently lost a self-governing deal that had played an essential part in drawing Disney's park-building attention to Florida in the first place.
So I get why Disney's stock is down by 3% in 2023, missing out on the general stock market's impressive bull run. But I also see a deeply undervalued Disney stock right now, changing hands at just 17 times forward earnings and 1.8 times trailing sales.
The brand value of the Disney name could be enough to carry the company through most downturns. The Pixar, Lucasfilm, and 21st Century Fox additions add more fuel to that brand-based fire. And if I had to pick a leader to design and execute a turnaround in this difficult situation, Bob Iger emerges as a formidable candidate for steering the company through these tumultuous waters.
Iger's list of immediate challenges starts with the Hollywood strikes, which could shrink and delay next year's content releases. When the new deals are signed, they seem likely to increase Disney's production costs forevermore. But that's just the cost of doing business in a creative sector, and Disney's rivals will wrestle with the same production-cost increases. It's not the end of the (Disney) world.
I have confidence in Iger's ability to deliver results in the two-year contract extension he signed up for. That makes Disney a solid buy at these modest share prices.
