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This year has been a difficult one for stock market investors. S&P 500 Down over 23% since the beginning of the year. But many high-profile stocks have gone from bad to worse, and as a result look incredibly cheap compared to their previous highs.
With that in mind, here are two beaten-down stocks that could reward investors for years to come.
1. Lowes
Similar to the performance of the S&P 500, Lowes (low 2.28%) Inventories are down about 28% to date. But there is also optimism in the US, the second largest hardware chain in the world.
First, Lowes is a machine that generates free cash flow. Free cash flow is an important metric because it shows how efficiently a company can generate cash after paying operating expenses and making capital investments. In his first six months of 2022, Lowe’s generated a staggering $5.3 billion in free cash flow for him.
As a result of its strong free cash flow, Lowe’s is a dividend aristocrat (a stock that has increased its dividend for at least 25 consecutive years) and has paid a quarterly dividend since going public in 1961. It currently pays a quarterly dividend of $1.05 per share, yielding about 2.3%.
Lowe’s stock price looks cheap compared to its historical price/earnings ratio (P/E). Lowe’s is trading at about 14x his P/E as of this writing. That’s his lowest in two years for a home improvement retailer. Over the past five years, Lowe’s has averaged around 23 P/E, well above its current valuation.
Image Source: Getty Images.
Many CEOs worry that rising mortgage rates will hurt the housing industry, but Lowe CEO Marvin Ellison is not one of them. He said in the company’s most recent earnings call: ”[A]With a low supply of housing and high interest rates, moving is undesirable, homeowners are willing to invest in their current homes to meet their needs. This is one of the main reasons why home renovations can win the market, whether home turnover is high or slow. ”
Still, while rising interest rates may not hurt Lowe’s customers, it could affect the company’s ability to borrow money in the future. Perhaps that’s why the company recently borrowed $4.75 billion from him at interest rates of 4.4% to 5.8%. Before the most recent bond issuance, Lowe’s net debt (total debt less cash and cash equivalents) reached his $27.4 billion in Q2 2022, and his $27.4 billion in Q2 2021. An increase of about 40% from $19.47 billion.
The majority of Lowe’s new debt has been spent on share buybacks, down nearly 10% from 707 million diluted shares outstanding to 639 million over the past 12 months. increase.
Despite mounting debt concerns, Lowe’s continues to deliver strong free cash flow to pay it off. The home improvement retailer is expected to report third-quarter earnings on November 16. If so, stocks are poised to rebound even in a difficult macro environment.
2. Nike
Despite record earnings over the past 12 months, Nike (NKE 1.92%) During that time, the stock has fallen 44%. One reason is that the world’s largest athletic apparel company, like many others, is dealing with inflation and rising transportation costs. Looking at the company’s gross margin (sales less cost of goods sold), he fell 2.2 percentage points from 46.5% in Q1 FY2022 to 44.3% in Q1 FY2023.
Nike inventory has also surged, reaching $9.7 billion in the most recent quarter, up 44% year over year. For apparel companies and retailers, more inventory means products aren’t selling as expected. There are many reasons why a product doesn’t resonate with consumers. On Nike’s recent earnings call, Nike CFO Matt his friend said:[C]Consumers face greater economic uncertainty, accelerating promotional activity across markets. ”
To combat rising inventory levels, Nike will also participate in promotions to liquidate excess products. It can get worse. In fact, management led a decline of 3.5% to 4% compared to Q2 2022.
The news isn’t all bad news for popular athletic apparel and footwear makers. This is because Nike has successfully transitioned over the past decade from relying on wholesalers and retailers to selling directly to customers. In the most recent quarter, sales from Nike Direct, a direct-to-consumer sales initiative, totaled $5.1 billion, up 8% year-over-year and accounting for 40% of the company’s total revenue.
Nike Direct had a very strong performance in the Asia Pacific and Latin American markets in the first quarter of fiscal year 2023, growing 30% year over year at constant currency.
Today, Nike’s stock trades at a P/E ratio of 25x. This is his lowest level since March 2020, when the COVID-19 lockdown began. Additionally, Nike pays a quarterly dividend, yielding an annual yield of approximately 1.4%. Notably, the company has raised its quarterly dividend every year since 2004.
Investors will have to wait patiently as Nike resolves short-term problems. Still, with a strong balance sheet, a history of innovation, and big-name brand ambassadors like LeBron James, Michael Jordan, and Serena Williams, the company should benefit from the doubt.
Keep an eye on Nike’s next earnings call for updates on inventory levels and whether gross margins improve. If so, expect the stock to continue to do what it has done for the past 50 years: keep winning.
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