2 Dirt Cheap Stocks That Could Skyrocket When the Market Rallies

The three major indexes have been climbing since the beginning of the month, but the market still hasn’t entered a bull phase. This will eventually happen because tough market times — like those of last year — always lead to periods of growth. All of this means there are plenty of opportunities for a lasting market rally down the road.

Now is the perfect time to prepare, and you can start by shopping for more than next week’s Thanksgiving dinner. It’s time to start looking for bargain stocks that could climb in a high-growth environment.

There are many possibilities out there right now, despite recent market gains. Two perfect examples are Carnival (CCL) (CUK) and Chewy (CHWY). Let’s take a closer look at these two dirt cheap players that may skyrocket when the market rallies.

1. Carnival
Not too long ago, things were rocky for the world’s biggest cruise operator. Carnival had to anchor its ships during earlier stages of the pandemic. As a result, the company shifted to a loss, and its debt soared.

But a combination of smart cost-cutting and strategic moves, along with a general rebound in cruise demand, has helped Carnival turn things around. In recent quarters, the company has grown adjusted free cash flow, a key element that will help it pay down debt in the future. And this year, the company paid off about $4 billion, favoring to pay down its variable rate debt. This was a good move as it protects the company against any increases in interest rates.

Meanwhile, Carnival has established a set of goals to reach within three years, such as a doubling of return on invested capital (ROIC). If it reaches its goal of 12% adjusted ROIC, the measure will be at its highest level in nearly two decades. Carnival also aims to increase adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in relation to passenger capacity by 50%.

So far, there’s reason to be optimistic about Carnival reaching those goals. In its most recent quarter, the company reported record-high revenue, a third-quarter record in customer deposits, and U.S. GAAP net income and adjusted EBITDA figures that beat its earlier estimates.

Carnival shares have already climbed 80% so far this year but still remain well under their pre-pandemic levels. At the same time, revenue is soaring. In fact, the stock trades for only 0.9x sales, down from more than 1.2x just a few months ago. From these levels, Carnival clearly could jump during a market rally.

2. Chewy
Chewy is the best friend of pets and their owners, thanks to its wide variety of items — from food to toys, and even health insurance. With this e-commerce company around, shoppers never have to worry about running out of their favorite essentials at the wrong moment — like at midnight, when their cats are particularly hungry. Thanks to Autoship, your favorite products reorder and ship to you without you needing to do anything.

Autoship is a key element for Chewy since orders through the platform make up 75% of the company’s total sales. This is important for investors to note because it offers a bit of visibility into future sales.

Chewy achieved an important milestone recently and is about to benefit from a new catalyst in the future. The company reached profitability last year. And it’s just expanded its platform into Canada, a market that it says could resemble that of the U.S. when it comes to profitability. If Chewy is right, this could be huge for earnings down the road.

Even in today’s tough economic environment, where shoppers are watching their wallets, Chewy still has managed to deliver growth. In the most recent quarter, net sales climbed in the double digits. Active customers’ spending also increased in the double digits. That, along with Autoship strength, is evidence that shoppers keep returning to the company.

Despite all of these positive elements, Chewy’s shares have declined about 40% this year and are trading for 36x forward earnings estimates. From these bargain levels, Chewy could take off during the next wave of market growth.

— Adria Cimino

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Source: The Motley Fool