The market's had its shares of winners this year. It has also had plenty of losers, but then you get to some of Wall Street's biggest losers. There are 37 stateside-listed stocks with market caps of at least $1 billion that have shed more than 50% of their value this year. Let's go over three that I think can bounce back, doubling in the year ahead.
Saying that Dollar General (DG 2.16%), Advance Auto Parts (AAP 2.53%), and Chegg (CHGG +1.52%) will soar by at least 100% in 2024 is saying a lot, but work the math back to the beginning of this year. Each name has been cut by more than half. Doubling from here by the end of 2024 would place these stocks no better than where they were two years earlier. Let's see why there is an opportunity in these out-of-favor stocks.
NYSE: DG
Key Data Points
Dollar General
Discounters have been discounted in 2023. Dollar General is a giant in the thrift store space with 19,448 locations. With a market cap of $23 billion, it's the largest stock to have shed more than half of its value, down 57% year to date.
The narrative has been largely the same for thrift store chains. Their core customer base is holding back on everything but food and essential household items. Unfortunately for Dollar General, those happen to be the items that pack the lowest markups. Throw in rising labor costs and other operating expenses, and it's been a disaster on the bottom line.
Image source: Getty Images.
Net sales rose 4% to $9.8 billion for Dollar General's latest quarter on flat store-level comps. It's not keeping up with inflation on the top line, and the damage is even worse as we work our way down the income statement, with folks holding back on the higher-margin discretionary items. Dollar General's operating profit would go on to slide 24%, and earnings per share plummeted nearly 29%. It's been more than a year since Dollar General has exceeded analyst profit targets.
The stock's fall has lifted its yield to 2.3%, but that's not going to excite income investors, with leading money market funds paying more than twice that rate. What will turn things around for Dollar General in the year ahead is a shift back to spending on discretionary goods. This is a win-win scenario for Dollar General. If the economy improves, its regulars will start spending on higher-margin merchandise again. If the economy deteriorates, it will find mainstream middle-class shoppers trading down to the Dollar General experience to save money.
Analysts see revenue growth accelerating to 6% next fiscal year with earnings growing even faster. Dollar General is a leader trading for less than 13 times forward earnings in a historically recession-resilient retailing niche. It's time for it to claw its way back.
NYSE: AAP
Key Data Points
Advance Auto Parts
Auto parts retail historically shines when the economy is iffy. Drivers keep their cars around longer to avoid making a big-ticket purchase, and that requires investing in auto care to make sure their vehicles age gracefully. Things obviously haven't worked out that way for Advance Auto Parts. The stock is down a blistering 64% in 2023.
It's been a rough summer for the 4,790-store chain. Its CEO and CFO moved on. It posted another "miss and lower" quarter. A credit rating agency downgraded its debt. The stock's slide also resulted in Advance Auto Parts getting bumped from the S&P 500 in August.
The good news is that sales growth remains marginally positive. The stock is now trading for less than 10 times next year's projected earnings. The shift to electric vehicles, which require less maintenance under the hood, isn't ideal, but the devalued stock is a bargain for an all-weather retailing niche. If new leadership can bring Advance Auto Parts more in line with its historically better-performing rivals, the stock could be a big turnaround candidate. It would have to nearly triple to get back to where it was at the start of this year.
NYSE: CHGG
Key Data Points
Chegg
One of this year's hardest-hit victims of the artificial intelligence (AI) craze is Chegg. The provider of tutoring services saw its stock plunge 48% in a single day, when it warned that Open AI's free ChatGPT service was eating into its new-subscriber growth. Chegg is down a brutal 66% this year.
Can a generative AI chatbot really take out a platform that combines on-demand assistance backed by a network of human instructors? Before you answer, consider that Chegg has been planning for the AI threat for years. You can teach an old educator some new tech tricks, and Chegg hopes that combining AI with its human touch will be a bar-raising moment for supplemental learning services.
The exodus so far is overblown. Revenue has dipped by 2% to 7% in each of last five quarters. Analysts see a return to top- and bottom-line growth next year, and Chegg is trading for less than 8 times next year's earnings. This year's poor pupil can move to the head of the class as an investment next year.
