As the year winds down and we're getting ready to celebrate the holidays, looking back at the stock market's rebound will undoubtedly bring extra joy to investors' faces. The S&P 500 rose by nearly 23% this year after dropping by more than 19% in 2022. Still, this doesn't mean all stocks rose in unison.
But these three stocks have underperformed the overall market. Of course, that alone doesn't make them worthy of purchase. Let's uncover why I think these stocks will put a smile on your face for many holiday seasons to come.
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1. Realty Income
Realty Income (O -0.17%) has severely underperformed the stock market this year. The shares have slipped 5.2% compared to a 24.9% gain for the S&P 500. Nonetheless, this real estate investment trust (REIT), which must pay out at least 90% of its taxable income as dividends, remains a strong choice for income-oriented investors.
Realty Income collects about 83% of its rent from retail tenants. That may cause some angst, given the threat from online shopping. But management carefully assesses the situation, renting to companies with a strong omnichannel presence or minimal online competition. These include grocery, dollar, convenience, drug, and home improvement stores.
Plus, the company's announced $9.3 billion purchase of Spirit Realty Capital (NYSE: SRC) will expand and diversify its real estate holdings.
Meanwhile, its existing portfolio has been performing well. Occupancy remains high, at 98.8% in the most recent quarter. And it was able to get a 6.9% boost on payments for expiring leases.
Realty Income, which pays dividends monthly, has raised them multiple times for more than 25 years. This includes the board of directors' recent decision to increase January's payment from $0.256 to $0.2565. The shares currently offer a 5.4% dividend yield, versus 1.5% for the S&P 500.
2. Etsy
Etsy (ETSY 0.34%), founded nearly 20 years ago, gained popularity during the early days of the pandemic when many people stayed home. The stock exploded in 2020, rising by more than 300%. Since then, the shares have dropped by about 55%.
But the online marketplace, which connects makers of creative goods with buyers, has executed well this year. The Etsy site grew active buyers by 4% to 92 million. Gross merchandise sales were flat, but management largely attributed this to an overall economy that saw people affected by higher prices. Now that inflation has abated, I think this will improve.
During the quarter, Etsy's top line rose by 7% to $636.3 million. It's difficult to compare earnings, since the company took a $1 billion impairment charge a year ago. However, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased by 8.6% to $182.2 million.
The stock, with a price-to-sales (P/S) ratio of 4.1, trades at a more attractive valuation. Earlier this year, the P/S multiple was about 8.
3. Target
Target (TGT 0.18%) has made some missteps that included holding too much inventory in the discretionary merchandise category. Investors punished the retailer's stock, which has fallen by over 7% this year.
However, management has taken steps to address the issue, including discounting inventory to clear the shelves of unwanted items and stock up on everyday items. In its fiscal third quarter, which ended on Oct. 28, inventory was 14% lower than last year. And while discretionary categories (like apparel and home furnishings) continue to struggle, Target's frequency categories (like beauty, household essentials, food, and beverage) have been doing well.
The better inventory position has led to an improved margin. Target's gross margin went from 24.7% to 27.4%, and its operating margin expanded by 1.3 percentage points to 5.2%.
Same-store sales have been under pressure this year, dropping by 4.9% in the quarter. However, I think that will improve, as a better economic environment will lead to higher discretionary spending. Target's stock sells at a price-to-earnings (P/E) ratio of 18, compared to over 30 earlier this year.
These three stocks offer compelling opportunities. Realty Income should appeal to income investors. Etsy sells at a more reasonable valuation while continuing to grow its business. And Target, after missteps, has moved to improve its inventory and margin, and sales growth should follow from a healthier consumer.
