Peloton Interactive (PTON +1.39%) is probably best known for its exercise bikes. But that business isn't actually the company's focus today because, well, it didn't turn out to be as profitable as hoped. The stock has cratered as a result and now the company is in the middle of a major business overhaul with still very uncertain results ahead.
If you like contrarian investing, you'd be better off with another company currently facing challenges -- and that's actually proven its ability to survive hard times: Hormel Foods (HRL +1.39%).
NASDAQ: PTON
Key Data Points
The rise and fall of Peloton
Peloton started life making digitally connected exercise bikes, quickly spreading out to other exercise equipment. At its core, the exercise equipment market is already pretty mature and saturated. What set Peloton apart was its ability to digitally connect its users into group classes.
To be fair, the technology was and is pretty cool. And the timing here couldn't have been better since Peloton basically started to go mainstream just as the coronavirus pandemic had people hiding in their homes. The company's sales took off as people looked for ways to recreate the gym experience at home.
Recognizing this fact, competitors quickly stepped in with competing offerings. Thus, you could spend far less for a similar product and still get a similar experience. And then the world opened back up again, after largely being shut by government mandate. Peloton was no longer a hot concept stock, with the shares peaking in early 2021.
Today, Peloton is moving away from devices and focusing on providing the digital aspect of its service in an asset-light business model. That's not a bad plan, per se, but the company has yet to prove it can create a sustainably profitable subscription service. It has partnered with some important companies, including Lululemon Athletica and more recently TikTok. Both resulted in stock price advances, but the shares are still dramatically below their peak levels.
The big risk is that Peloton doesn't actually manage a successful and sustainable transition to an online subscription model.
Hormel is a lot more boring
A contrarian investor might like the idea of buying an unloved stock, but the uncertainty around Peloton's business model shouldn't be ignored. Basically, Peloton has yet to figure out what it wants to be when it grows up. Most investors would be better off with a company that has a reliable business that's simply facing hard times. That's where food maker Hormel comes in.
NYSE: HRL
Key Data Points
Hormel owns a collection of iconic food brands and is, largely speaking, a well-run and respected business. But it is dealing with some notable headwinds, including avian flu, slow growth in China, a difficult nut market, and a slower-than-peers process in passing rising costs on to consumers via price increases. That's a long list of problems, but none are likely to be permanent. And, perhaps more important, none of them changes the underlying business, as the company remains a leading consumer staples company.
But Wall Street is impatient and has pushed the shares down roughly 40% from their recent highs. The dividend yield is near the highest levels in the company's history at 3.5%. Oh, and Hormel is not only profitable, but it is also a Dividend King with over five decades worth of annual dividend increases behind it.
HRL Dividend Yield data by YCharts
If you like buying when others are fearful, both Peloton and Hormel would fit the bill. But when you dig into the business models of each company, only one looks like it has a sustainable business today. Yes, if Peloton pulls off its Hail Mary pass transition effort to an online subscription service there is huge upside. But if it fails, which is very possible, an investment in the stock could turn out to be worthless. Hormel, on the other hand, seems far more likely to muddle through the headwinds it faces and, eventually, earn back Wall Street favor.
Choose your risks wisely
There's nothing wrong with contrarian investing, but there's a difference between investing and speculation. Peloton's business has virtually no track record and what there is, well, isn't so impressive. Buying it is basically betting that it can create a real business from the ashes of its old one.
Hormel has a real business that's just going through a rough patch, and so it is likely to be a far less risky contrarian bet. And you get to collect that historically high dividend yield while you await better days.
