With all major equity indices posting double-digit year-to-date losses, investors have had a tough year. But sooner or later, this bear market will turn into a new bull market. While some stocks still look expensive based on traditional valuation metrics, there are currently plenty of solid companies up for sale.
Three Motley Fool contributors each recently picked a company that could offer even better returns than the market average. Here’s why they chose eBay (EBAY -1.47%), Texas Truck Stop (TXRH -1.78%)and Turn (RVLV -2.97%).
A cheap title and an asset-light business model
Parkev Tatevosyan (eBay): With stock markets falling and the US economy arguably in recession, it pays to own companies that can perform well in this environment. It’s one of the reasons why eBay is one of my favorite stocks to buy now. The e-commerce and auction site is known for its great prices on used and new products. Additionally, since the company operates on an asset-light business model, it is not as heavily impacted by rising inflation.
eBay does not own any of the inventory sold on its platform. Instead, it brings buyers and sellers together and encourages them to transact. It does this by processing payments, providing buyers and sellers with fraud protection, and supporting the technology that makes it all possible. What’s remarkable is what the company doesn’t do: it leaves shipping and handling to buyers and sellers to settle among themselves, avoiding costly service.
eBay is not a high-flying growth stock; revenues have remained relatively stable over the past decade. But earnings per share grew at a compound annual rate of 23.6% over that period.
Additionally, if the economy enters a prolonged downturn, consumers may turn to eBay’s lower-priced second-hand goods more often. They might also try to sell more of their own used items to generate cash. Each would be a desirable outcome.
Fortunately, the falling stock market caused eBay shares to sell at a relatively inexpensive valuation. With a price-to-sales ratio of 2.7, eBay is arguably as cheap as it has been in the past five years.
Consistency and quality service in the restaurant industry
John Ballard (Texas Roadhouse): Finding a successful restaurant early in its growth cycle can be one of the easiest and most rewarding ways to generate above-market returns.
Texas Roadhouse looks very promising. The stock has generated a 15% annualized return for investors over the past 10 years, but the focus on consistency, quality of service and performance-based management culture should maintain the growth streak for many years.
This steakhouse chain was founded in 1993 and has 680 restaurants in 49 states, including a growing footprint in 10 foreign countries. The company started in Clarksville, Indiana, but now operates restaurants around the world in places like Saudi Arabia and Taiwan. That says a lot about how this concept adapts across cultural boundaries.
Despite 40 years of high inflation driving up commodity costs for the restaurant industry, consumers continue to eat out. Texas Roadhouse expects to post positive comparable sales growth for the full year. It saw an 18% year-over-year increase in revenue in the first half of the year, with model sales up 8% in the second quarter.
The restaurant growth stock is attractively priced with a forward price-to-earnings ratio of 23. For a company offering a consistent return on investment in the mid-teens, this is a good price to initiate a position.
A thriving fashion stock with huge potential
Jennifer Saibil (Revolve Band): Revolve Group is an AI-powered fashion retailer that has done what many fashion retailers have been unable to do over the past few years: demonstrate meaningful growth. Sales increased 54% year-over-year in 2021, and the company continued to deliver strong results in 2022, with a 27% increase in the second quarter. Active customers, average order value and total number of orders placed continue to increase.
Revolve Group is also profitable, albeit under pressure from inflation. Net income was $16.3 million in the second quarter, down 48% from a year ago.
Management didn’t have an exciting update for the rest of the year. He said July sales were up 10% from a year ago, a huge slowdown from what has been fantastic growth. Not surprisingly, investors don’t like to hear that growth is stopping, even if it may be temporary. So it’s also no surprise that Revolve Group’s stock is down 57% this year.
But I think the slowdown is very likely to be temporary. There are several reasons to consider Revolve Group returning to an incredible future. Above all, he speaks the language of his market.
Revolve Group is in touch with the way millennials think and buy, and it’s giving this core market what it’s looking for. It offers a large, constantly updated collection of designer clothing, shoes, accessories and beauty products, and markets these products through a large network of celebrities, influencers and other social media personalities and bloggers. Everything it does is powered by artificial intelligence and machine learning, making it easy for Revolve Group to know what’s hot and what’s not.
Since it’s completely online, he can easily add and remove products. This helps him sell more products at full price instead of being forced to put items on sale at the end of a season. In 2021, 87% of items were sold at full price. This percentage is expected to be lower in 2022, but Revolve Group’s model is a proven winner.