So far in 2023, the S&P 500 and Nasdaq Composite indexes have posted stellar total returns of 16% and 30%, respectively. However, much of these returns have come from the mega-cap MANAMANA stocks, which have risen between 31% and 189% this year.
A literal who's-who of massive businesses, these behemoths have driven the markets higher, yet many smaller stocks -- such as the three we will look at today -- have entirely missed this rise. Worse yet, Enphase Energy (ENPH 3.80%), The Toro Company (TTC 0.90%), and Doximity (DOCS 0.97%) are down between 29% and 53% on the year.
So, are these falling knives or top stocks available for cheap?
Here's why I can't help but think it is the latter.
Enphase Energy: Down 53% year to date
Posting a jaw-dropping total return north of 2,700% over the last five years -- even after its drop in 2023 -- Enphase and its semiconductor-based microinverters and batteries have been thriving amid the solar industry's boom.
Converting energy at the individual solar module level, Enphase's microinverters are superior to solar systems using a string inverter system, which cannot account for partial shading of a solar panel layout as effectively. Generating the bulk of its revenue from residential solar installations, however, the company recorded its first quarter-over-quarter sales decline in two years as homeowners battle skyrocketing inflation.
Generally, when customers pay cash for a solar system using Enphase's products, they see a 70% to 90% offset in their electrical bill, resulting in a payback period between five and seven years.
However, with credit card balances at all-time highs and student loan debt repayments restarting, many customers have been effectively forced to finance their solar systems at today's unsightly rates if they deem the project essential. This extends the payback period for the solar system, making it less of a slam-dunk proposition than it was one or two years ago.
This confluence of events may weigh on the company for the next handful of quarters as Enphase's installers gradually work through their excess inventory. However, prospecting investors may want to consider the cyclical company as its share price bottoms out.
Trading at 21 times free cash flow (FCF), Enphase is now the cheapest it has ever been on a FCF-generating basis.
ENPH Price to Free Cash Flow data by YCharts
With an innovative product line that includes batteries and bi-directional electric vehicle (EV) chargers that can power houses during outages, Enphase's discount is too good for me to pass on as EVs become increasingly common.
The Toro Company: Down 29% year to date
Recording a total return of over 4,000% since the turn of the century, Toro and its suite of mowing, snow-blowing, landscaping, construction, and irrigation products have dwarfed the S&P 500's mark of 370% over the same time. However, after delivering a dreadful third-quarter earnings report that saw sales decline by 7%, the stock plummeted nearly 20% in one day.
Like Enphase, Toro has taken a hit from homeowners being more cautious with their spending. Its residential unit posted a staggering 35% drop.
So what on Earth makes Toro interesting right now? Three things:
- Lowe's partnership: It recently announced a partnership to sell its mowing, power equipment, and snow-blowing products in Lowe's for the first time starting in 2024. Toro should see a recovery within its residential unit.
- Masterful acquirer: While the company swung and missed on its Intimidator Group acquisition (resulting in a $150 million impairment charge in Q3), Toro has delivered an average return on invested capital (ROIC) of 24% over the last decade. Measuring a stock's profitability compared to its debt and equity, high ROICs indicate shrewdly invested capital -- meaning that other than one bad purchase, Toro's acquisitive nature has historically generated outsized profits.
- A growing 1.7% dividend: Despite more than quadrupling its dividend since 2013, the company's payout ratio remains a measly 29%, leaving a long runway for future increases.
With a price-to-sales (P/S) ratio of 1.8 (the company's lowest since 2016) and a forward price-to-earnings (P/E) ratio of 20, Toro's steady growth, strong profitability, and rising dividend make it an excellent lifetime holding.
Doximity: Down 40% year to date
Counting 80% of U.S. physicians and 90% of graduating medical students as members of its physician cloud, Doximity is quietly setting the stage to revolutionize the healthcare industry. Offering its Dialer telehealth product, a multitude of workflow solutions (e-fax, scheduling, and messaging), and a newsfeed that keeps doctors up to date on relevant healthcare news and job opportunities, Doximity's app is a must-have.
This widespread adoption of the Doximity physician cloud among medical professionals makes the app incredibly valuable to pharmaceutical companies and hospital systems looking to market their products.
Just how valuable? Founded only 13 years ago, Doximity counts all 20 of the top 20 pharmaceutical companies and hospital systems as customers. In simplest terms, the company's marketing solutions have already become essential to marketers.
However, with marketing spend flattening in the U.S. as advertisers waited to see if a recession was coming, Doximity's revenue growth slowed to 20% in its most recent quarter, sending its stock crashing.
Ultimately, this reaction to the company's earnings could be seen as a massive overreaction, as Doximity's growth was three times larger than the 6% increase advertisers saw in 2023. Furthermore, of the 430 pharma brands in the U.S. with more than $100 million in annual sales, only five are estimated to spend more than 50% of their advertising budget with Doximity. Overall, the company believes it has less than a 5% penetration rate across this vast market, meaning it is still in the early chapters of its growth story.
The cherry on top of it all for investors?
Doximity boasts a massive FCF margin of 31% -- even after accounting for stock-based compensation. Trading at 23 times FCF and 25 times next year's earnings, Doximity looks too cheap considering its growth potential as the healthcare industry modernizes.
