Investors have mixed ideas about how much valuation should affect their stock-buying decisions. If everything about a company sounds amazing, should a rich valuation matter?
I would break valuation down into three categories. There are some astronomical valuations that simply scream, "Don't buy right now." With expectations that high, the market is bound to be disappointed at some point, sending the stock plunging. Then, there are those in the middle where the valuation is high but not outrageous, and that can generate strong opinions.
The third group are the bargains, where the stocks are cheap despite their long-term growth prospects. Sometimes it's recent performance that's weighing on the stock price, and other times, the market just looks like it's missing the full story. Williams-Sonoma (WSM 0.17%) is an incredible company that's feeling the impact of inflation, and Skechers U.S.A. (SKX 11.20%) just isn't getting investors excited. If you have $500 to invest in the new year, these both look like bargains right now.
1. Williams-Sonoma: Premium housewares, cheap valuation
Williams-Sonoma sells posh housewares through its eponymous stores, and it also owns several other home goods and furniture brands that cater to an upscale clientele. The business tends to be resilient since much of its target market isn't penny-pinching, even in tough times. However, there are several factors working against it right now. One is a dismal overall housing market, and the other is lasting financial pressure that's affecting some of its customers.
In the fiscal 2023 third quarter (ended Oct. 30, 2023), comparable brand revenue, which it uses as its base top-line metric, decreased 14.6% year over year. However, it remained strongly profitable. Gross margin increased 2.9 percentage points to 44.4%. Earnings per share (EPS) was $3.66, and operating margin was 17.0%. Those were both down from last year but above management's expectations. They're also well ahead of pre-pandemic levels.
Data by YCharts.
Management is expecting continued pressure in the near term. However, there are several factors that should work in the company's favor in the long term. A whopping 66% of Williams-Sonoma's sales come from e-commerce in an underpenetrated industry -- only 30% of total houseware and home furnishing sales come from e-commerce, in contrast to 46% for apparel and 80% for consumer electronics. Williams-Sonoma only controls about 1% of its total addressable market, but that should rise organically as more customers shop online. The company is also expanding its markets with business-to-business initiatives and new regions abroad.
The cherry on top is that Williams-Sonoma pays a dividend yielding 1.7% as of this writing. Its stock trades at a price-to-earnings ratio of 14, and it's a no-brainer value stock to add to your portfolio.
2. Skechers: Budget activewear and a bargain stock
Skechers has carved out an activewear and footwear niche as the budget alternative to premium brands like Nike. However, it collaborates with celebrities as well and has cultivated more of a quirky image than a cheap one, leading to brand differentiation and a loyal fan base.
And in this inflationary environment when shoppers can't necessarily afford to pay extra for fancy labels, the company is still growing. Sales increased 7.8% year over year in the third quarter, way ahead of Nike in its comparable period. Even better, Skechers is distinguishing its brand with direct-to-consumer sales up 23%. That's great for creating consumer loyalty, and it's also important in expanding margins, since profitability is stronger for direct-to-consumer sales. Gross margin indeed improved from 47.1% in the year-ago period to 52.9%, and operating margin expanded from 6.9% to 10.5%.
Operating margin is in line with usual levels, but gross margin has soared. Management attributed that to "favorable pricing, a higher mix of direct-to-consumer sales, and lower unit costs."
Data by YCharts.
EPS was up 69% year over year as a result. Though Skechers doesn't pay a dividend, it does have a share-buyback program with $100 million of stock repurchased in the past year.
Skechers trades at a price-to-earnings ratio of 18, and it has been a market-beating stock for years. I expect that to continue, and now is a great time to buy.
