While few investors enjoy suffering red ink on their portfolios as it materializes, the velocity of erosion this year has led to red-hot stocks to snap up. Indeed, last year, many market participants bemoaned that their favorite opportunities became priced into the stratosphere. Now, the volatility presents a time machine of sorts.
Fundamentally, the downgrade in the equities sector (and thus the opportunity in red-hot stocks) centers on the Federal Reserve. Early in the coronavirus pandemic, the central bank implemented dovish policies to bolster the devastated economy. Now, the Fed must unwind prior to monetary excesses. To do that, it committed to a hawkish strategy.
However, the challenge moving forward is that Wall Street organically adjusted for the implied rise in interest rates, which increases the cost of borrowing and thus reduces the incentive for business expansion. That’s deflationary to the economy, which explains the red-hot stocks on discount.
For the intrepid contrarian, here are some compelling cheapened market ideas to consider.
Although analysts often state that electric vehicles represent the future of mobility, 2022 provided a different narrative. Few if any EV manufacturers avoided the pressure that stemmed from escalating inflation, supply chain disruptions, and other major headwinds. Among them, premium EV maker Lucid (NASDAQ:LCID) suffered a dramatic erosion in its equity value.
To be fair, the red ink isn’t exactly unjustified. Still featuring elements of an aspirational enterprise, Lucid only recently began posting sales. For instance, in the second quarter of 2022, the company generated revenue of $97.3 million. That’s a far cry from the $200,000 generated in the year-ago period. Nevertheless, with its retained earnings line item coming in at a loss of $6.38 billion, Lucid has much work to do.
If you have a contrarian spirit, LCID may qualify as one of the red-hot stocks to snap up. Per Kelley Blue Book, the average price of a new EV stands at nearly $63,000. With the median household income currently near $71,000, buying an EV is not realistic for most families. However, Lucid makes no bones about currently catering exclusively to affluent buyers. Therefore, LCID might succeed where others stumbled.
As difficult as circumstances are for EVs right now, it’s very possible that this sector indeed represents the future. However, prospective investors must exercise caution. After all, the sector may be the future but no brand offers an exclusive guarantee. But that’s where metals and mining firm Vale (NYSE:VALE) enters the frame.
According to its corporate profile, Vale is the world’s largest producer of nickel. Fundamentally, this fact offers significant upside implications as nickel represents a critical component of EV batteries. Further, management itself sees global demand for the metal increasing by 44% by 2030, citing EV-related demand.
To be fair, against a year-to-date framework, VALE lost less than 3%. However, against April’s peak, VALE slipped nearly 37%. That’s a sizable discount among red-hot stocks that’s difficult to ignore. Moreover, Gurufocus.com labels the enterprise as modestly undervalued.
For one thing, VALE features a forward price-earnings ratio of under 5 times, below the sector median of 9.3 times. Also, the company features growth and profitability metrics that rank within the top echelon of the mining industry. This is one of the red-hot stocks to pick up because its discount doesn’t make much sense.
NuScale Power (SMR)
One of my favorite red-hot stocks to discuss (quite literally in this case), NuScale Power (NYSE:SMR) may represent the future of nuclear energy. Unlike traditional nuclear-based facilities, NuScale specializes in small modular reactors or SMRs. These powerplants enjoy a smaller footprint that’s much easier to integrate across diverse geographies. Essentially, then, NuScale can bring nuclear power closer to the source of demand.
While the sector carries certain unfortunate controversies, this segment is not going anywhere. No other power source features the same energy density as uranium. Moreover, nuclear facilities command the highest capacity factor or measurement of reliability.
What makes NuScale so special is that its modular platform effectively enables power decentralization; that is, rather than one giant facility, NuScale can spread the energy footprint with several smaller SMRs. Most importantly, NuScale integrates its SMR design with innovative safety features.
Since its August peak, SMR slipped around 25%. While the company’s financials leave much to be desired, the long-term narrative is too compelling to ignore. It’s easily one of the red-hot stocks to pick up on a discount.
While I wouldn’t classify the phenomenon as groundbreaking as Friedrich Engels’ and Karl Marx’s “The Communist Manifesto,” a worker revolution nevertheless materialized recently. As fears of the Covid-19 pandemic faded, many employers became more aggressive regarding their return-to-the-office protocols. To no one’s surprise, millions of workers cried bloody murder. At least some of these folks will enter the gig economy, which bodes well for Intuit (NASDAQ:INTU).
Best known for its tax and accounting software, Intuit natively presents a relevant profile. Taxes can be complicated despite various political initiatives to make them less so. However, as fresh faces expand the gig economy, they’ll soon discover that taxes for independent contractors (gig workers) are much different from those who are corporate employees.
Succinctly, the difference between the 1099 and W2 tax forms centers on the magnitude of involvement. With the latter, the company automates most of the details. But with the former, the freelancer must keep accurate books to prepare taxes appropriately (and legally). In my opinion, Intuit’s tax software should help lessen the blow and ease the learning curve.
Still, Wall Street imposed a 36% discount on INTU. That seems aggressive given the relevancies. Therefore, it’s one of the red-hot stocks to buy.
Five Below (FIVE)
I keep using the word relevant throughout this list of red-hot stocks but I really mean it with Five Below (NASDAQ:FIVE). An American chain of specialty discount stores, shoppers can find great deals here. Plus, the company provides itself with a more upscale appearance and ambiance compared to literal discount dollar stores. Moving forward, FIVE offers a balanced approach to what might come next.
Obviously, if inflation dominates the monetary landscape despite the Fed’s best efforts, then discount retailers will rule the day. At some point, hard-hit consumers will swallow their pride and pivot more of their funds to stores like Five Below.
But let’s say for argument’s sake that deflation becomes the dominant trend. Even so, FIVE provides confidence for stakeholders. That’s because deflation – fewer dollars chasing after more goods – implies a hurting labor market. The net result is largely the same: hard-hit consumers seek good deals to help make ends meet.
Yet FIVE declined by nearly 35% YTD. More enticingly, Gurufocus.com labels the business as significantly undervalued. Prominently, Five Below carries a return on equity of nearly 22%, ranking better than 81% of its peers. It’s easily one of the red-hot stocks to buy.
Warby Parker (WRBY)
At first glance, discount eyewear specialist Warby Parker (NYSE:WRBY) doesn’t seem like a natural idea for red-hot stocks to buy. Since the start of the year, WRBY dropped almost 69% of its equity value. Furthermore, its financial status is messy. For instance, the company ranks in negative territory for key metrics like return on equity or return on assets. Nevertheless, contrarians may want to give WRBY a closer look.
For instance, while it’s true that the company suffered wider-than-expected losses in Q2, it also posted sales of $149.6 million. This tally came out just ahead of the FactSet consensus of $149.5 million. Interestingly, WRBY gained substantially following the earnings disclosure as speculators bid up the security. Over the trailing month, shares gained nearly 3%.
Fundamentally, Warby Parker benefits from a cynical but powerful catalyst. Researchers project that by 2050, nearly half of the global population will suffer from myopia (nearsightedness). Further, the available evidence in the U.S. indicates that Americans will not be spared from this unfavorable trend. Thus, WRBY is worth considering among discounted red-hot stocks.
Early in the Covid-19 crisis, Netflix (NASDAQ:NFLX) rapidly emerged as one of the top cynical beneficiaries. Fundamentally, the pandemic shut down collegiate and professional sports leagues. With no reason to have expensive TV subscriptions, many then cut the cord. However, Netflix acting as its own content generator helped provide much-needed entertainment to the masses.
Unfortunately for Netflix, binging on various programs got old. As Covid restrictions faded, people rushed out the door, leading to significant subscriber losses and crimson stains on the financials. Invariably, NFLX eroded this year.
However, the streaming giant recently posted encouraging results for its Q3 report. Moreover, increased traffic data suggests that the entertainment ecosystem is beginning to normalize. Whether people got tired of their vacations or simply didn’t have the money to continue their outward trek, more consumers are returning to their living rooms. That’s music to Netflix’s ears.
Despite the massive jump in NFLX following its earnings disclosure, shares are still down over 54% YTD. If you want to take some risks with your red-hot stocks on a discount, this could be it.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.