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These Stocks Could Double in 2016

By Dan Caplinger, Tamara Walsh, and Tim Beyers - Jan 23, 2016 at 10:02AM

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Bargain opportunities abound in a beaten-down market. Find out about three of them.

The stock market has started 2016 in a near-panic, and major market benchmarks have fallen 10% in just the first few weeks of the year. Contrary to popular opinion, falling markets are a great time to look for bargain stocks, and many stocks already suffered greatly in 2015 and look poised for strong returns. Below, you'll learn about three stocks -- Melco Crown Entertainment (MLCO 5.24%)Whole Foods Market (WFM), and Pandora Media (P) -- that could double in 2016.

Dan Caplinger (Melco Crown): The casino industry in Macau has taken a huge hit over the past couple of years, as the economy across the Asia-Pacific region and particularly in China has sputtered from its former high growth rates. Melco Crown Entertainment has been one of the hardest-hit casino companies in the area, as most of its rivals have more extensive exposure to other areas beyond Macau and therefore have been better diversified to protect against the slump there.

Given how far the stock has fallen, Melco has the chance of doubling if things start going right in Macau. Admittedly, 2016 has begun on a negative note for China, as economic concerns have sent the nation's stock markets sharply downward. For Melco, though, the biggest issue is whether Macau can make a successful transition away from its former reliance on high-roller VIP gamblers toward catering more to a mass-market tourist audience. As new resort properties come online in Macau, the region faces more competitive pressure than ever. Yet most investors are betting against Melco and its Macau peers, and that opens the door to a contrarian gold mine if the gaming industry fares better in 2016 than those following the Asian gaming capital expect.

Tamara Walsh (Whole Foods Market): Wall Street punished Whole Foods Market in 2015, with investors pushing the stock down more than 40% over the past year. The culprits: declining earnings, employee layoffs, and worries about increased competition in the organic space. However, the pessimism seems overblown now that shares of Whole Foods are trading within a couple dollars of the stock's 52-week low of $28 a share. After all, this is still a fundamentally sound company with smart leadership and strong brand equity.

Whole Foods is currently the largest U.S. chain of natural and organic grocery stores. This makes it a market leader in the fast-growing organic space. Yet, with just 434 stores in the U.S., Canada, and the U.K today, there is still plenty of growth ahead for the health food chain. In fact, the company plans to triple its store base going forward, to around 1,200 locations in the U.S. alone.

The company's 365 by Whole Foods value store concept is another promising growth avenue. The smaller format (think: lower overhead costs) of these stores combined with the more affordable prices of Whole Foods' private-label 365 Everyday Value brand should translate into a home run for the retailer. Whole Foods plans to open the first three of these stores this year and up to 10 in 2017. If the new store concept proves a success, it could bolster Whole Foods' price competitiveness and fuel revenue growth.

For these reasons, I believe Whole Foods is a quality stock that could double in the year ahead once the market realizes the recent sell-off was overdone.

Tim Beyers (Pandora): In a middling year for the stock market, shares of Pandora Media fell 25% in 2015. Higher royalty rates and worse-than-expected guidance and growth have conspired to punish investors betting on this business for the long term, leaving the stock trading near a 52-week low. Why should we expect any different in 2016?

The answer, I think, is that expectations have come down so far, so fast, that analysts and traders have come to see Pandora as far less than what it really is: a new and better model for music discovery that replaces the need to own tracks or even albums. Users are willing to pay more for this functionality, especially if you look at the last four quarters of data:

  • Q4 2014: 81.5 million active listeners, $268 million in revenue, $3.29 per active listener
  • Q1 2015: 79.2 million active listeners, $230.76 million in revenue, $2.91 per active listener
  • Q2 2015: 79.4 million active listeners, $285.56 million in revenue, $3.59 per active listener
  • Q3 2015: 78.1 million active listeners, $311.56 million in revenue, $3.99 per active listener

While lumpy, it's worth noting that we're seeing this per-user growth despite increasing competition from Amazon.com and Apple in streaming music. The latter, in particular, recently announced 6.5 million paying subscribers for its streaming music service.

Pervasiveness is what matters here. Although Pandora hasn't shown linear growth in listeners, the audience as a whole continues to produce more revenue per listener because of how well the platform engages its members. Options to listen to ads (or not) and buy tracks or albums feed a revenue stream that's been growing consistently.

Just as important, Pandora is directly available to drivers of 160 different models of cars. In that sense, Pandora is disrupting terrestrial radio while Spotify, Amazon, Apple, and others fight for space on mobile devices. That positioning is worth much more than Pandora's $2.2 billion in market cap, especially when you consider that the total radio advertising market exceeds $17 billion, as of this writing.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of AAPL and WFM. Tamara Walsh owns shares of AMZN and AAPL.  Tim Beyers owns shares of AAPL. The Motley Fool owns shares of and recommends AMZN, AAPL, P, and WFM. 

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Stocks Mentioned

Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.
WFM
Pandora Media, Inc. Stock Quote
Pandora Media, Inc.
P
Melco Crown Entertainment Limited Stock Quote
Melco Crown Entertainment Limited
MLCO
$5.82 (5.24%) $0.29

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