The market has been wobbly over the past month as high interest rates continued to drive investors from stocks toward fixed-income investments. But the S&P 500 is still up 11% year to date, so we have yet to encounter a true market pullback.
But when that market pullback happens, investors should be ready to pick up some shares of well-run companies at discount valuations. These three underappreciated stocks deserve to be on that shopping list: Rivian Automotive (RIVN 6.10%), Apple (AAPL -0.35%), and Lululemon Athletica (LULU 1.31%). Here's why.
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1. Rivian Automotive
Rivian sells three types of electric vehicles (EVs): the R1T pickup truck, the R1S SUV, and an electric delivery van (EDV) for its top investor Amazon. Unlike many other new EV makers struggling to ramp up their production in a tough market, Rivian already produces tens of thousands of vehicles every year. In 2022, Rivian manufactured 24,337 vehicles and delivered 20,332 vehicles. It expects to more than double its production to 52,000 vehicles this year.
Yet Rivian's stock still trades more than 70% below its IPO price, for three reasons. First, it repeatedly reduced its production targets as it grappled with supply chain constraints. Second, it issued several safety-related recalls. Lastly, it continued to rack up steep losses while increasing its leverage with more convertible debt offerings. All of those weaknesses made it an easy target for the bears in a high interest rate environment.
With an enterprise value of $17.5 billion, Rivian doesn't seem expensive at 4 times this year's sales. By comparison, Tesla trades at 8 times this year's sales. But Rivian's stock could get even cheaper in a market pullback, since it still hasn't proven it can scale its business or generate stable profits. That said, Rivian could be a screaming bargain for daring investors if it gets cut in half -- since it expects to significantly ramp up its production over the next two years.
2. Apple
Over the past decade, the bears claimed Apple's high-growth days were over, it was too dependent on the aging iPhone, and it was starved for innovation. Yet during those 10 years, Apple's stock has delivered a total return of over 1,000%.
Apple crushed the market because its users stayed loyal to its brand, it locked them in with its expanding ecosystem of services, and it bought back nearly 40% of its shares. It ended its latest quarter with $166 billion in cash and marketable securities, which gives it plenty of room for fresh investments and acquisitions. Its forward dividend yield of 0.6% might seem paltry, but its low payout ratio of 16% gives it plenty of room for future dividend hikes.
Apple's stable growth, fortress-like balance sheet, brand appeal, and sticky ecosystem all drove Warren Buffett's Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) to allocate a whopping 47% of its entire portfolio to Apple. It's probably a good idea to follow the Oracle of Omaha's lead here and also make Apple one of your top holdings.
Apple might seem a bit pricey right now at 26 times forward earnings, especially since it's bracing for a near-term slowdown in iPhone sales, but its valuations could become a lot more attractive during a market downturn.
3. Lululemon
Back in 2019, Lululemon declared it would double its digital revenue, double its men's revenue, and quadruple its international revenue from fiscal 2018 (which ended in February 2019) to fiscal 2023 through its "Power of Three" growth plan.
Lululemon achieved its digital and men's goals ahead of schedule in fiscal 2021, even as it temporarily closed its stores during the pandemic, and surpassed its international target in fiscal 2022. That success drove it to launch a new "Power of Three x2" plan last April, which set the same goals of doubling its digital and men's revenues and quadrupling its international revenue from fiscal 2021 to fiscal 2026. It reiterated those targets during its latest conference call in August.
Lululemon's robust growth was fueled by three catalysts: its sticky brand loyalty, the expansion of its direct-to-consumer channel, and its overseas growth. Analysts expect its revenue and earnings to grow 18% and 21%, respectively, in fiscal 2023, even as inflation curbs consumer spending and squeezes its gross margins.
Lululemon looks reasonably valued at 27 times forward earnings, but a market downturn could compress its valuations and make it an undervalued growth stock. If that happens, I'd definitely add it to my portfolio as a leading retail play.
