Investors have different ideas about how much valuation should influence stock buying decisions. If everything about a company sounds great, does a rich valuation matter?
I divide my evaluation into three categories. There are also astronomical valuations that just scream “don't buy now!” If expectations are this high, the market is bound to be disappointed at some point and stock prices will plummet. And then there are companies in the middle with high but not outrageous valuations that can generate strong opinions.
The third group are undervalued stocks, which have low stock prices despite long-term growth prospects. In some cases, recent performance may be weighing on the stock price, and in other cases, the market may seem to be missing the bigger picture. williams sonoma (WSM 0.48%) This is a great company that is feeling the effects of inflation. Skechers USA (SKX -2.25%) It just doesn't excite investors. If he has $500 to invest in the new year, both seem like a bargain right now.
1. Williams-Sonoma: Luxury home goods, cheap reviews
In addition to selling high-end home goods through its namesake stores, Williams-Sonoma also owns several other home goods and furniture brands aimed at upscale customers. This business tends to be resilient, as many of the target markets don't miss a penny even during tough times. However, several factors currently prevent this. One is the overall downturn in the housing market, and the other is lingering financial pressures that are affecting some customers.
In the third quarter of fiscal 2023 (ending October 30, 2023), comparable brand revenue, which we use as a fundamental top-line metric, decreased 14.6% year-over-year. However, it continued to make solid profits. Gross profit margin increased by 2.9 percentage points to 44.4%. Earnings per share (EPS) was $3.66 and operating margin was 17.0%. Both of these were down from last year, but exceeded management's expectations. It's also well above pre-pandemic levels.
Data by YCharts.
Management expects continued pressure in the near term. However, there are some factors that work in the company's favor in the long run. A whopping 66% of Williams Sonoma's sales come from e-commerce in a low-penetration industry. Only 30% of total sales of housewares and home furnishings come from e-commerce, compared to 46% for clothing and 80% for household electronics. Williams-Sonoma only controls about 1% of the total addressable market, but that percentage should naturally increase as more customers shop online. The company is also expanding its market in business-to-business initiatives and new regions abroad.
The best part is that Williams-Sonoma is paying a dividend yield of 1.7% as of this writing. It trades at a price-to-earnings ratio of 14 times, making it an easy value stock to add to your portfolio.
2. Skechers: Affordable activewear and great inventory
Skechers is Nike. However, the brand also collaborates with celebrities, creating a quirky rather than cheap image that differentiates the brand and creates a loyal fan base.
And even in this inflationary environment where shoppers can't necessarily afford to pay extra for flashy labels, the company is still growing. Third-quarter sales increased 7.8% year-over-year, significantly outperforming Nike in the comparable period. Even better, Skechers saw a 23% increase in direct-to-consumer sales, making the brand stand out. This is great for creating consumer loyalty and is also important for increasing profits since direct-to-consumer sales are more profitable. In fact, gross margin improved to 52.9% from 47.1% in the year-ago period, and operating margin expanded from 6.9% to 10.5%.
Operating margins are in line with normal levels, but gross margins have skyrocketed. Management attributes this to “favorable pricing, a high proportion of direct-to-consumer sales, and low unit prices.”
Data by YCharts.
As a result, EPS increased by 69% year-on-year. Skechers doesn't pay a dividend, but it has a stock repurchase program and has bought back $100 million in stock over the past year.
Skechers trades at a price-to-earnings ratio of 18 times and has been a market leader for many years. We expect this situation to continue, so now is a great time to buy.
Jennifer Cybill has no position in any stocks mentioned. The Motley Fool has positions in and recommends Nike, Skechers USA, and Williams Sonoma. The Motley Fool recommends the following options: His January 2025 $47.50 long call against Nike. The Motley Fool has a disclosure policy.
