Long-term buy-and-hold investors know that time in the market matters. The longer you can hold a stock, the better the chance it will turn into a winning, market-beating investment. Another lesson worth learning is that the price you pay for the stock also matters. Buying a fantastic company when its stock is overvalued can significantly reduce, if not prevent, shareholder gains.
Luckily, patient investors can often find great businesses trading for big discounts and use those opportunities to either add to an existing position or buy a stock for the first time. The key is to identify companies with struggling stocks showing evidence of turning things around. Here are five stocks that fit this description to buy now at a discount.
Shopify
Year to date, Shopify (SHOP 1.23%) is up 104%. That might seem surprising to shareholders who bought the stock when it was near its late 2021 high, because they're still in the red -- the red as the stock is still down 58% from that peak. Shopify currently trades a price-to-sales (P/S) multiple of 14. This isn't cheap, but it's a lot closer to the company's all-time low P/S of 6 than to its historical average of 23.
There's reason to be optimistic about Shopify's future as an investment. Shopify's revenue has remained strong and consistent. In the third quarter of 2023, revenue growth was 25%, right in line with where it's been over the previous several quarters.
More importantly, Shopify tipped back into positive territory on the bottom line, posting net income of $718 million for the quarter, a massive improvement from the net loss of $159 million in Q3 2022. This was only the company's second positive net income result in two years.
NASDAQ: SHOP
Key Data Points
Charles Schwab
Down 33% year to date, Charles Schwab (SCHW 2.53%) stock has had a rough year. After shares sold off during the banking drama in March, Schwab's stock has struggled to regain its lost value. The result is a stock trading for a price-to-earnings (P/E) multiple of 19, which is a discount to its 10-year historical average of 26.
Schwab is facing some headwinds that are contributing to the struggling stock performance, specifically higher interest rates. Schwab collected $671 million more in interest revenue in Q3 2023 but had to pay out $1.4 billion of interest payments to its customers.
Schwab makes around one-quarter of its revenue from managing its customers' assets, so the 18% year-over-year increase in assets under management is welcome news to shareholders. This indicates that Schwab remains a trusted company for its customers' wealth and should help it get through this short-term rough patch.
NYSE: SCHW
Key Data Points
Lemonade
Up-and-coming insurance company Lemonade (LMND 2.14%) has also seen significant struggles for its stock. Shares trade today for a whopping 91% off their 2021 peak. The stock today can be bought for a P/S multiple of 2.9, not far off the all-time low of 1.8.
The concern, and one of the reasons the stock has seen such a decline, is that Lemonade still has not gotten its loss ratios to an acceptable level. Put simply, an insurance company's most important job is to underwrite insurance so that it pays out as small of a percentage of the collected premiums as possible.
In Q3 2022, Lemonade's loss ratio was 94%, meaning the company was paying out almost all its premiums in claims. The good news is that the loss ratio in Q3 2023 improved to 83%, which is much closer to industry peers. GEICO, for example, had a loss ratio of 80% in Q3 2023. If this trend continues, Lemonade could end up looking very cheap at today's price.
Outset Medical
After a year of disappointing news and financial results, medical device company Outset Medical (OM 2.78%) has seen its stock decline 80% in 2023. Shares now trade for 1.9 times sales, very near an all-time low. As bad as that result has been for shareholders, it could be a fantastic buying opportunity.
Much of the stock's decline was due to a warning letter from the Food and Drug Administration (FDA) that prompted Outset to halt the sale of one version of its Tablo kidney dialysis device. This pause was voluntary so that Outset could submit what was necessary to the FDA. The news itself sent the stock tumbling, and the resulting dip in sales added to the stock's troubles.
However, Outset's Tablo device is still being sold, and the version that's currently on pause will eventually resume. Tablo's installed base increased by 54% in 2022, so it's not inconceivable that this growth could continue once the FDA concerns are in the rearview mirror.
NASDAQ: OM
Key Data Points
Walt Disney
Walt Disney (DIS 0.62%) needs no introduction. As the owner of beloved theme parks and some of the most well-known intellectual property in the world, Disney is about as ubiquitous as a publicly traded company can get. That said, it's been a challenging past few years for the company and the stock is down 53% from its 2021 high. The pandemic, CEO transitions, and a cash-burning streaming service are the primary drivers of Disney's woeful stock performance but there are reasons for hope.
First of all, the parks business is back to its pre-pandemic levels. Revenue for Disney's domestic and international parks was $7 billion in the fiscal fourth quarter of 2023, ended Sept. 30, which is in line with the Q4 2019 results. Secondly, Bob Iger is back as CEO and seems intent on reining in Disney's spending. Disney initially set a goal of reducing expenses across the business by $5.5 billion by the end of 2024. The company now expects to be able to reduce expenses by $7.5 billion.
Disney stock trades for 2 times trailing sales, close to a recent low not seen in over a decade. With the promising results seen in this most recent quarter, there's reason to believe buying at today's discount could work out very well for investors.
