A bull market always follows a bearish one, and so the best way to benefit when the market is down is to buy stocks that can soar when the bull period returns.
With the S&P 500 up some 20% so far this year, it's no stretch to say that a bull market is coming. It's a great time to buy top stocks at low prices before they start soaring, but it's important to know the difference between undervalued stocks and stocks that are cheap because pessimism is appropriate.
With that in mind, I'm going to recommend an undervalued stock to buy and a cheap stock to avoid, both in the food industry.
The IPO stock you didn't notice
There were a lot of initial public offerings (IPO) in 2021. In fact, it was a record year, with more than 1,000 IPOs. To put that into perspective, 2020 itself was a record IPO year with 480. This year, there have been 148 so far. A few stocks from 2021 caught investor attention quickly, but you can be forgiven for not noticing some of stocks with great potential that faded next to the hype of others.
Toast (TOST 3.42%) stock surged when it went public, but as with many IPO stocks, especially from that inauspicious year, it tanked soon after. It's been rough since then as high-growth, unprofitable stocks fell out of favor with the market last year. But Toast has continued to demonstrate robust growth and improving profitability, and investors should take a closer look at this beaten-down stock.
Toast markets a software-as-a-service (SaaS) platform for the restaurant industry. It provides everything a restaurant needs, including hardware and software, menu options, delivery options, payment options, and more. It positions itself as the go-to source for the restaurant industry, which is its competitive edge against its biggest competitor, Block's Square seller's business.
Restaurant growth has persevered despite inflation, and Toast gets a bite of all the growth from its client base. Investors love SaaS companies like Toast because they have sticky recurring revenue -- clients pay a regular fee so long as they remain clients. As Toast increases its client base and offers more services and solutions, revenue is almost guaranteed to keep growing. Its annualized recurring revenue run rate increased 40% year over year as of the end of the third quarter.
Plus, Toast added 6,500 new locations to its platform, bringing the total to nearly 100,000. This scale is leading to improved profits, which is what you want to see for a growing company. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive and are growing, and its net loss shrank from $98 million in last year's third quarter to $31 million in the same period this year.
Image source: Toast.
Toast stock trades at a price-to-sales ratio of 2.2, which looks like a bargain price for a stock with massive growth potential.
The IPO stock you did notice
Beyond Meat (BYND 0.95%) did catch investor attention when it went public in 2019, and it rose rapidly before falling off a cliff. The meat alternative brand hasn't caught on with its consumers the way investors initially had hoped, and sales have been declining.
One problem is the macro headwinds of inflation, which are impacting many food and retail brands. Customers are simply conserving their money and switching down to cheap brands instead of indulging in expensive alternatives.
But Beyond Meat is also struggling with massive competition from other brands and a concept that hasn't taken off. Management positioned the company to target meat eaters, who just aren't all that interested in giving up meat, and health advocates don't find meat alternatives all that healthy.
Add to this that costs are rising, and Beyond Meat is not only posting a net loss and an operating loss but also a gross loss and negative gross margin. In the 2023 third quarter, sales fell almost 9% from last year in the quarter, and gross profit margin was -9.6%. Third-quarter performance was worse than expected.
Beyond Meat stock trades at a price-to-sales ratio of 1.4, or much lower than Toast's. But don't be misled by what looks like a value trap. Beyond Meat stock is cheap because of its dire outlook.
Don't get me wrong, there's always the contrary argument and the chance for a turnaround. Management is cutting expenses all around and trying to drive growth through pricing action and messaging about health, and the company is demonstrating better performance in its international markets than in its U.S. market. Those trends could become meaningful to company operations.
But investors are better served by investing in cheap stocks that are demonstrating high growth now and that can become profitable at scale, like Toast.
