It's not fun to see your portfolio lose value, but market corrections can lead to rare opportunities to invest in undervalued companies before their share prices rebound in the next bull market.
While there are still headwinds in the economy that could weigh on stocks in the near term, a new bull market is coming (if not already here). In the meantime, some stocks are trading at incredibly low valuations.
The retail industry is one area of the market that is turning up some great stocks at a bargain right now. If you have spare cash and want to add deep value stocks to your portfolio to boost your returns, here's why you might want to consider Williams-Sonoma(NYSE: WSM) and Qurate Retail Group(NASDAQ: QRTEA).
1. Williams-Sonoma
You wouldn't know that retail spending has been weak lately by looking at Williams-Sonoma's latest numbers. The company reported solid comparable-store revenue growth of 8.1% in the fiscal 2022 third quarter (ended Oct. 30, 2022).
Growth over the past year has been impressive given the high inflation and other economic headwinds. The company is keeping store shelves stocked to meet demand, which is a competitive advantage right now given the struggles at many other retailers. This is why Williams-Sonoma has been able to grow earnings per share by 18% through the first nine months of the year.
Some market participants are worried about a possible recession, layoffs at major companies, and how that could impact consumer spending in 2023. That explains why the stock is down over the last year, despite strong operating performance. Management reported some choppiness in demand last quarter, which added to these fears.
Still, the stock is already down 38% off its all-time high and trades at an attractive forward price-to-earnings (P/E) ratio of just 9.9 based on this year's consensus earnings estimate. Considering the average stock trades at a multiple of around 20, the stock could climb quickly if the market decides to reward the company with a higher P/E multiple.
Why does the stock deserve a higher valuation? Williams-Sonoma benefits as more people entertain at home, and management is also excited about other opportunities. For example, the company just launched its website in India last year and opened the first Pottery Barn store in New Delhi.
Management is also excited about the prospects of its business-to-business segment, which grew 17% year over year last quarter and represents an $80 billion total addressable market. This is a high-performing retailer that is showing an ability to sustain above-average growth for the long term.
2. Qurate Retail Group
Qurate Retail is a stock for investors willing to accept above-average risk for potentially very lucrative returns. This is a turnaround situation as Qurate has struggled to generate growth and is currently losing money, but management is implementing a promising plan to right the ship. Here's why the company should eventually be able turn the corner.
Qurate owns several top brands with QVC and HSN reaching over 200 million households across 14 TV channels. But revenue plunged last year, partly as a result of a fire at one of Qurate's fulfillment facilities in Dec. 2021. The weak revenue results, decline in the stock price, and rise in interest rates last year caused the company to record impairment charges totaling $3.1 billion in the third quarter, which completely offset the company's third-quarter revenue.
The stock has fallen 92% from its all-time high. However, management has started to execute a plan to return to revenue growth, improve profitability, and invest more in live streaming to better connect with a TV audience that has ditched cable. While QVC and HSN sell goods through their websites, these brands also depend on people tuning into live TV broadcasts.
The reason to bet on the stock is that Qurate Retail's top brands benefit from a unique customer demographic that should drive long-term revenue growth. The company's core customers are women in their 50s with above-average income. This potentially makes the business less susceptible to a recession than other retail brands.
Management sees opportunities for growing free cash flow over the next few years by reducing inventory levels and supply chain costs. Starting in the second half of 2023 and into 2024, management sees between $300 million and $500 million of operating cash flow to capture on an annual basis. That makes the company's current market cap of about $1 billion look very cheap.
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John Ballard has positions in Qurate Retail. The Motley Fool has positions in and recommends Williams-Sonoma. The Motley Fool has a disclosure policy.
