The broader market has taken a beating over the last few weeks, and many investors are looking ahead to 2024 with cautious optimism. While uncertainty still looms over the economy, some beaten-down stocks may be primed for a major rebound as conditions improve. Indeed, these are companies that could stage impressive comebacks over the next year.
The Federal Reserve’s aggressive interest rate hikes have largely paused for now. This could relieve the intense pressure on the stock market, and prevent severe selloffs like last year. While volatility may persist in the near-term, this recent pause in rate hikes offers hope that the worst may be over. Plus, some high-quality stocks appear oversold at current levels, and I don’t believe they can go too much lower from here.
Of course, broader economic conditions will need to improve, for nay potential comeback to materialize. Factors like employment, consumer spending, and corporate earnings growth will need to show signs of resilience. But for patient investors, snapping up some undervalued, beaten-down stocks is a good idea. Here are the three stocks I’m considering buying right now.
Warner Bros Discovery (WBD)
Warner Bros Discovery (NASDAQ:WBD) has endured a rollercoaster ride thus far in 2023. The media giant, formed through the mega-merger of Discovery and WarnerMedia assets last year, has seen its shares plunge over 55% from peak levels.
Several factors have driven the stock’s descent. Integration challenges, subscriber losses, and ballooning debt levels instilled fear in investors. Additionally, recent earnings misses due to economic headwinds have kept the pressure on. Currently, WBD stock trades at bargain-basement levels, with a forward price-earnings ratio of just 12-times. Is this an opportunity to grab an out-of-favor growth stock at a discounted valuation? I believe so.
Let’s examine the bull case. Warner Bros Discovery remains on track to deliver approximately 25% sales growth this year through its combined portfolio of media assets. Meanwhile, the copmany is aggressively paying down debt and restructuring its business model to improve efficiency. With its attractive content production engine, Warner Bros Discovery should see substantial free cash flow generation over time. Additionally, the recent Hollywood writer’s strike has also concluded, removing a key headwind.
No doubt, challenges persist. The turnaround will take time, and macroeconomic uncertainty brings risk. But at just 12-times forward earnings, WBD stock offers a compelling risk-reward setup for patient investors. The market has priced in an overly dire scenario, while the company’s upside potential remains significant. Accordingly, the average analyst has a price target of $20.70 on the stock, implying 90% upside over the next year.
Dollar General (DG)
Dollar General (NYSE:DG) has plunged nearly 60% from all-time highs. With the stock languishing around $100 per share, pessimism gone too negative, in my opinion, and the market appears to have more than priced in all the headwinds with this stock.
Dollar General lowered its full-year sales outlook, now projecting growth of just 1.3-3.3% growth, versus a prior 3.5-5% range. Margins are compressing as well. However, a 60% haircut seems outsized, given Dollar General’s stable brand and the essential nature of its value-based offering. The company retains dominant positions in rural America and enjoys substantial competitive advantages in small-box discount retail.
Trading at just 13-times forward earnings, DG stock looks poised to bounce back. Inventory gluts and margin pressures may linger in the near term, but the stock is unlikely to fall much further. Once macro conditions stabilize, Dollar General’s steadfast free cash flow generation and growth profile should return to the fore for investors. Plus, the stock’s deep discount provides a reasonable margin of safety for investors willing to stomach some turbulence. With pessimism peaking, the risk-reward appears skewed positively for long-term investors.
Carnival Corporation (CCL)
Carnival Corporation (NYSE:CCL) saw its shares crater as the pandemic halted the company’s operations, leading to a precarious financial position. Thus far, Carnival has steered through the turbulent waters well. Thus, while the path to recovery remains challenging, I believe CCL stock offers substantial upside potential from its current battered levels.
Clearly, Carnival faces huge debt obligations as it recovers from Covid shutdowns. In addition, rising interest rates magnify the impact of its heavy leverage. To top it all off, higher fuel costs will pressure near-term profitability as oil prices have spiked. I wouldn’t rule out more downside over the near-term, with all that in mind.
However, the stock arguably reflects these risks. Trading at just 14-times 2024 earnings and 0.73-times sales, CCL stock looks very compelling. As travel demand persists, CCL should continue ramping capacity utilization and driving higher onboard revenue. In the long-run, interest rate pressures will also inevitably start easing.
Regardless, Carnival still faces turbulence. However, I think its upside could be measured in multiples of the current share price over the long-run. The company retains strong brands and boasts an asset-light platform, which should drive profit margins higher as revenues recover. It’s just a waiting game until interest rates come down, whenever that is.
On the date of publication, Omor Ibne Ehsan 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.
