3 Dirt-Cheap Stocks That Could Rule the Market in 2023

After years of witnessing growth stocks outperform value shares, investors saw a change in fortunes in 2022 as value stocks crushed growth shares.

In an uncertain environment, valuations for high-growth stocks have come tumbling down, and investors have turned to value stocks for safety.

Heading into 2023, the good news for investors is that there are a number of value stocks that still look like absolute bargains. Keep reading to learn about three of them.

1. Williams-Sonoma
Williams-Sonoma (WSM) is a well-recognized brand in home furnishings. It generates outstanding results, with an operating margin of 15.5% in its third quarter. The company put up spectacular growth during the pandemic and even in 2022 with comparable sales growth of 8.1% in its third quarter, outperforming its peers, and three-year comparable sales growth approaching 50%.

Despite that strong performance, the stock currently trades at a price-to-earnings ratio of just 7, and that cheap valuation has allowed the company to reduce its share count by 11% over the past four quarters, elevating earnings per share.

The stock fell after Williams-Sonoma’s third-quarter earnings report, when the company stepped away from its 2024 guidance calling for $10 billion in revenue. But that was more a reflection of macroeconomic uncertainty than any underlying problems with the business.

Williams-Sonoma is still well-positioned to deliver solid growth in 2023, and with its stock already cheap, it could easily jump, especially if we get a “soft landing” from the Federal Reserve’s rate increases in 2023.

2. Petco
Pet stocks are a proven recession-proof sector as consumers spend on their cherished creatures in good times and bad, and the surge in pet adoptions during the pandemic expanded the market.

While pet stocks largely crashed in 2022 after that boom, the pullback has set up some bargains in the sector. One of them is Petco Health and Wellness (WOOF).

Petco has more than 1,500 stores across the country and — together with PetSmart — dominates the brick-and-mortar pet retail industry. However, the company’s push into digital initiatives and services is what really makes the stock attractive as it’s leveraging its brick-and-mortar locations with higher-margin businesses such as veterinary care and grooming.

Overall revenue growth in its most recent quarter was slow at 4% as the company laps stronger growth in 2021, but services revenue increased 14%, or 38% over a two-year basis, and digital revenue rose 10%, or 42% on a two-year time frame.

As it opens more veterinary clinics and grooming salons, Petco should continue to deliver outsize revenue growth in its services segment.

The shares currently trade at a price-to-earnings ratio of 12, or just five times adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), making it a great recession-proof stock with upside potential.

3. Camping World
Finally, Camping World Holdings (CWH), the country’s largest RV retailer with nearly 200 locations, rounds off the list.

Camping World currently offers a whopping dividend yield of 11%. While that might make the stock seem like a yield trap, the retailer is well-prepared for a potential downturn, focused on cost-cutting to fund its dividend, and continuing to grow with its roll-up strategy, acquiring independent RV dealers and rebranding them as Camping Worlds.

The company has also found success with its used RV business, which offers higher margins, and it saw growth in used vehicles in the most recent quarter. It’s also been growing its Good Sam membership program, which helps drive its service business and increases customer loyalty.

The RV industry boomed during the pandemic, and as business has slowed, Camping World’s profits have fallen, but revenue was only down slightly in its most recent quarter, showing that new business has been stickier than some might have expected.

Meanwhile, the wave of retiring baby boomers and the rise of remote work should help support demand for RVs.

Camping World stock currently trades at a price-to-earnings ratio of 5 on a trailing basis and less than 7 on a forward basis. If it can meet expectations in 2023 and pay its dividend, investors could reap a strong return from the stock.

— Jeremy Bowman

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Source: The Motley Fool