The S&P 500 has fallen roughly 7% this year and is 11% off its 52-week high. Naturally, that hasn’t been an even distribution of 7% losses for each stock across the market — some have fallen by appropriate levels, but others have plummeted more than they deserve.
The fact is investors are panic selling in response to lower oil prices, slowed economic growth in China and higher interest rates. However, keep in mind that interest rates have risen just marginally — and any future increases are expected to be minor as well — China is still growing, and while lower oil prices are turbulent for energy companies, it is great for consumer spending.
Several babies have been thrown out with the bathwater — and that spells opportunity for you.
That said, let’s look at eight stocks to buy now that have fallen unjustly during the market’s pullback — stocks that the market will soon realize are cheap.
Stocks to Buy Now: Restoration Hardware Holdings Inc (RH)
Restoration Hardware (RH) has fallen 20% this year, and that was after it started the year with losses of 25% from its highs of $106.49. Altogether, RH is trading 42% from its peak, thereby creating an excellent investment opportunity.
According to management, 2014 was a “bridge year” — a year when RH closed smaller legacy stores and replaced them with stores that had six to eight times more product assortment, allowing the company to stock some of its most popular inventory in categories like Baby & Child and Lawn & Garden.
RH has already opened eight of these massive stores, has signed leases for another 10 Design Gallerias, and is in negotiations for another 25. Management told RH investors that 2015 would produce slower-than-expected growth, but that it would return to 20%-plus growth in 2016.
With gas prices and unemployment rates at decade lows, and analysts expecting growth of 18% this year, RH is in a perfect situation to exceed expectations and trade significantly higher in 2016. With a $2.5 billion market capitalization, RH is very cheap given its long-term guidance for revenue of $5 billion and a mid-teen operating margin.
Stocks to Buy Now: XPO Logistics Inc (XPO)
XPO Logistics (XPO) has fallen 18% this year and 56% from its 52-week high. Ironically, what sparked these big losses was two massive acquisitions and guidance for EBITDA of at least $1.7 billion in 2018 and revenue of $23 billion in 2019.
Investors fear that XPO has taken on too much debt, and that its outlook is too aggressive given the slowdown in several segments within logistics. What the market does not realize is that XPO has more flexibility with its capital expenditures than a 2008 recession-like event would have on its EBITDA.
As management previously explained, XPO’s free cash flow might actually rise in a down market.
Nevertheless, XPO will produce free cash flow of $300 million this year, and $600 million next year. For a $2.4 billion growth company trading at $22 per share, that puts XPO at a very cheap multiple to FCF.
Stocks to Buy Now: The Kroger Co (KR)
Kroger (KR) stock has fallen 10% in 2016, which is somewhat odd given that supermarkets and grocery retailers tend to perform well in down markets.
This is especially unusual given the reputation as a market share thief that Kroger has developed over the last decade.
KR has produced 47 consecutive quarters of identical supermarket sales growth. Looking ahead, Kroger is expected to have another stellar year with growth of 5.7%.
In retrospect, there have not been too many opportunities since 2013 to buy KR stock this much below 52-week highs. Given the positive effect that low gas prices tend to have on consumer spending, coupled with Kroger’s expected performance for 2016, this pullback should result in a great entry point in a truly terrific company.
Stocks to Buy Now: BlackBerry Ltd (BBRY)
I don’t suppose it is really all that surprising that BlackBerry (BBRY) stock has fallen 25% this year. After all, BBRY has not been the best performing stock in any market over the last few years, and it is historically a horrible stock in down markets.
However, investors must remember that BBRY surged from $7 to $9.50 just before this market downturn occurred, and the reasons were evident.
In BBRY’s last quarter, it certainly appeared that its new Priv handset drove strong performance for the company and a handset segment that shipped 700,000 units. The Priv is BBRY’s first smartphone that runs an Android operating system, a phone that is priced at a $700 premium. During BlackBerry’s last quarter, its average selling price for phones jumped 31% quarter-over-quarter to $315 — a clear reflection that BBRY sold a higher mix of Priv smartphones.
Keep in mind, the Priv was only available at one carrier in the U.S. and for just one month during BlackBerry’s last quarter. Moving forward, the Priv will be available with more carriers both internationally and in the U.S. — and for a full quarter — when BBRY reports earnings April 1.
The fact is BBRY does not need to sell too many Privs for there to be a great effect on its stock price. Just 2 million at an ASP of $700 in 12 months would add $1.4 billion in revenue. With analysts expecting just $2 billion in revenue for the coming year, and all signs pointing toward a strong Priv launch, BBRY looks poised to finish 2016 much better than it started.
Stocks to Buy Now: Seagate Technology PLC (STX)
The fact that Seagate Technology (STX) has fallen 23% this year and is 56% off its 52-week high is rather shocking to me.
This is a company whose dividend not only yields more than 9% at current prices, but is completely safe!
That said, Seagate operates in a storage business that is very much tied to the performance of PC sales; about half of its revenue is created from PC-related operations. But it also is tied to the consistent and fast-growing performance of data centers and cloud storage, respectively.
With $2 billion in free cash flow, STX trades at just 4 times FCF. Meanwhile, Seagate’s dividend obligations cost less than $700 million annually.
In other words, its dividend is safe, and in markets like this, investors like big, safe dividends and cheap stocks.
Hence, STX will rise soon.
Stocks to Buy Now: Walgreens Boots Alliance Inc (WBA)
Walgreens Boots Alliance (WBA) is down 16% over the last six months, with 7% of those losses coming this year.
Yet despite these losses, WBA is presenting a great long-term buying opportunity. It has everything that investors want. WBA has growth from both acquisitions and organically.
Also, Walgreens has a safety margin associated with being a leader in retail pharmacy — a space that is not typically impacted by the economy.
WBA is expected to grow 19.5% this year, and will grow another 30% in 2017 once it acquires Rite Aid’s (RAD) $30 billion in annual revenue.
At 15 times forward earnings, WBA stock is presenting a great entry point for long-term gains.
Stocks to Buy Now: Michael Kors Holdings Ltd (KORS)
Michael Kors (KORS) could be a direct beneficiary of lower gas prices, as consumers have more discretionary income.
At just 8 times earnings, all the bad news that caused its 45% stock decline over the last year is priced into KORS.
While Michael Kors may not have the explosive growth that made it a Wall Street favorite several years ago, it is a company that is still growing faster than GDP, and is priced well below the S&P 500 index.
Again, this is a great entry point for a long-term investment.
Stocks to Buy Now: Twitter Inc (TWTR)
Twitter (TWTR) has had an awful start to the year, down 25%. The fact that just about all of Twitter’s executives, when it went public, are now gone has certainly caused a shift in momentum.
With current CEO Jack Dorsey being a co-founder and respected entrepreneur, only he could have enforced such drastic changes to leadership, and to its corporate structure.
While these changes, including job cuts, may have a short-term drag on TWTR, the long-term effects should be accelerated growth. This includes monetizing 500 million logged-off users who see tweets but do not have an active Twitter account.
At 3.7 times next year’s expected sales, TWTR stock has never been cheaper, and is far cheaper than other social media companies.
As of this writing, Brian Nichols was long RH, XPO, STX, BBRY and KR.