Wall Street often puts stocks on the discount rack for good reasons. A company might be facing a new competitive threat, for example, that harms its long-term earnings potential. An expensive and ill-timed acquisition could do the same thing by distracting management with an ultimately value-destroying project.
Sometimes stocks go on sale for the wrong reasons, though, like a temporary industry downturn. These cases lay the groundwork for strong returns if you're willing to invest in shares when pessimism is high.
Let's take a closer look at a few of these discounted stocks that should recover their momentum. Read on for some reasons to like Home Depot (HD 0.94%), Chewy (CHWY 2.99%), and Crocs (CROX 1.53%) right now.
1. Home Depot
Home Depot has been through many downturns in the home improvement industry, including a brutal one during the Great Recession. Yet the retailer has emerged from each of these cyclical slumps to set new records in areas like market share, sales, and annual earnings. This time isn't likely to be any different.
It's true that Home Depot, like its retailing peers, is seeing weaker demand for expensive items like appliances. Some professional contractors are putting off big projects right now, too. These pressures combined to help push comparable-store sales down 2% in the most recent quarter.
Home Depot affirmed its outlook that calls for a similarly modest decline for the full fiscal 2023 year. The company is projecting solid profit margins of over 14% of sales and has plenty of cash available to continue boosting its dividend.
In fact, executives just approved a plan to spend more cash on Home Depot's stock. Investors should consider following that lead as shares are flat this year while the wider market has rallied 16% higher.
2. Chewy
The pet supply industry is known for being recession resistant. It also has a bright long-term outlook as people welcome more pets into their families. Yet Chewy, one of the leading e-commerce specialists in this attractive niche, has had an awful 2023 with shares down nearly 50%.
That's a half-off sale that investors shouldn't ignore.
The last earnings report did contain some warning signs on the business. Management said shopping trends weakened later in the quarter, adding uncertainty to the 2023 outlook.
But Chewy's customer acquisition trends have stabilized, its gross profit margin is healthy, and engagement is strong among its current customer base. These shoppers spend, on average, $530 per year, mainly using its subscription service. That figure was up 15% in the most recent quarter.
The stock might see more volatility ahead as investors parse the timing and duration of any industry downturn. But Chewy's business is fundamentally strong and should bounce back over time.
3. Crocs
Crocs shares are down nearly 20% so far this year, but the business' momentum is headed in a much more positive direction. Sales in the second quarter were up 12% to cross $1 billion, earnings expanded even faster, and its profit margin landed at a healthy 30% of sales.
In late July, management raised its 2023 outlook on the core revenue, profitability, and earnings metrics following a solid start to the second half of the year for the footwear producer.
It's true that the industry is under increasing pressure as consumers scale back on spending and footwear retailers cut prices to try to keep inventory moving. Crocs, and especially its HeyDude brand, won't be impervious to these headwinds.
But most Wall Street pros still expect sales to rise by about 12% this year. Thanks to the stock's slump over the last several weeks, that growth can be purchased at a nice discount today.
