To build wealth in stocks, Investors have to stomach the occasional bouts of market volatility, but the longer you invest, the more you view huge declines in the stock as an opportunity to score a bargain before the stock takes off again.
Cava Group (CAVA +4.30%), Roku (ROKU +0.71%), and Home Depot (HD +3.39%) are trading at huge discounts to their previous highs, but three Motley Fool contributors believe these stocks are due for a rebound. Let's find out why.
NYSE: CAVA
Key Data Points
Cava Group is serving up delicious growth
John Ballard (Cava Group): Finding small consumer brands before they become household names is a great way to find future winners. This is particularly true for up-and-coming restaurant chains, and Cava Group is showing the early signs of joining the elites of dozens of successful chains over the last half-century.
The company still has a small footprint of just 213 restaurants, but its Mediterranean concept taps into the healthy lifestyle megatrend that should serve it well. Even as a small chain, it has a balanced footprint of stores stretching from California to New York, with a strong presence in the Southeast, too.
Its high rate of growth shows it is going big places. Revenue rose 49.5% year over year in the third quarter. Most importantly, same-restaurant sales look very Chipotle-like, clocking in at a healthy (no pun intended) 14% year over year.
These are huge numbers for a stock that is trading 29% below its initial public offering. The stock's valuation is rich at a price-to-sales ratio of 4.3, which is high for a restaurant business. However, Cava is also starting to let those robust restaurant-level margins shine through as it reported a net profit of $6.9 million, reversing last year's loss.
At this rate of profitable growth, investors who buy at these lows should do well over the next five years and beyond.
NASDAQ: ROKU
Key Data Points
This streaming stock is on the mend
Jeremy Bowman (Roku): Like a lot of the streaming industry, Roku was a big winner during the pandemic, but the stock came crashing down in 2022 as the digital ad market ground to a halt and the company ramped up expenses at just the wrong time.
Since then, Roku has taken pains to right the ship, and those efforts seem to be paying off. The company has issued multiple rounds of layoffs to bring costs back in line with revenue, and it returned to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability in its third quarter. The company also successfully launched its own Roku-branded TVs, winning a number of rave reviews for them.
Additionally, Roku is benefiting from a number of other tailwinds. The digital advertising market seems to be rebounding, with revenue up 20% in the third quarter, its fastest growth rate in several quarters. The company should also benefit from price increases at a number of streaming services and the proliferation of streaming advertising tiers, which will expand its ad inventory.
Meanwhile, there are signs that the transition of advertising from linear TV to connected TV is accelerating, which will also favor Roku. Roku remains the clear leader in streaming distribution, and its user base is growing rapidly, up 16% to 75.8 million in the third quarter. Streaming hours rose even faster, increasing 22% to 26.7 billion.
Roku stock is still down more than 80% from its pandemic-era peak, one sign that it still has a lot of room to run. Investors can take advantage of the sell-off as the rebound appears to just be starting.
NYSE: HD
Key Data Points
Housing will bounce back, and you want to be ready
Jennifer Saibil (Home Depot): It's been a rough year for many housing stocks. People aren't buying due to higher mortgage rates that could double the overall price of a home. When people stay in their current homes, there's less inventory for sale, further dragging down a slow market.
That trickles down in other ways, too, and furniture and home improvement stores feel the pinch. Home Depot is also impacted by inflation directly since customers are steering clear of expensive items when they are watching their wallets more carefully.
Home Depot is demonstrating rare sales declines and profit crunches. It's not a surprise that its stock is down, but it's very short-term thinking. Home Depot is the largest home improvement chain in the world, with more than 2,300 stores and a top omnichannel system, and this is a near-term challenge that it should overcome with ease when the climate is right.
Sales declined 2% from last year in the 2023 fiscal second quarter (ended July 30), and earnings per share (EPS) fell from $5.05 to $4.65. Management reaffirmed its full-year outlook of a 2% to 5% sales decline and a 7% to 13% decline in EPS.
This isn't the first time in its history that Home Depot has faced pressure or disappointed investors. But it's always rebounded in a better place, and Home Depot stock has beaten the market by almost double over the past 10 years.
Home Depot stock is down 10% over the past three months, and that includes an uptick from last week's market rally. At this price, its dividend yields 2.77%, its highest in a decade outside of the 2020 market crash. While the stock is low, you can benefit from passive income at a rate you're not likely to see again from this stock. And when it bounces back, you'll benefit from years of long-term gains.
