The stock market got off to a solid start in 2023, with the S&P 500 up nearly 4% (after being up as much as 9% early last month).
Even with the good start, many individual stocks are still deep in bear market territory, and the Federal Reserve continues to telegraph its intention to keep raising interest rates, which seems even likelier after strong January employment and retail sales reports and a hotter-than-expected personal consumption expenditures reading, which is the Fed’s favorite inflation gauge.
The good news is that the pressure from rising interest rates and the prospects of a recession are making a lot of quality stocks cheap. Two Motley Fool contributors were asked to explain why 3M (MMM) and CarParts.com (PRTS), which are trading down 55% and 71%, respectively, from recent highs, both look like buys right now.
Beyond some short-term legal risks, there is good value in 3M stock
Parkev Tatevosian: Trading down 55% off its high in 2019, now might be an excellent time for investors to consider 3M stock. The 121-year-old company profitably manufactures a diverse assortment of products that give it a presence across multiple industries and in several countries. While the troubled economy has had some effect on the stock price, much of the reason for its current reasonable valuation lies in concerns about its fiscal exposure to multiple lawsuits it is facing.
Over decades, 3M has established itself in categories critical to enterprises and consumers. That’s put it in a position to consistently deliver revenue topping $30 billion annually. More impressively, 3M has improved efficiencies in its business to expand its earnings per share from $6.72 in 2013 to $10.18 in 2022. Of course, rising profits allowed management to return capital to shareholders. Over the past decade, 3M’s annual dividend per share has increased from $2.54 to $5.96.
Fortunately for investors, 3M stock is trading at a relative discount. Measuring by its forward price-to-earnings ratio of 12.46, 3M stock is selling at a valuation investors don’t often see. Admittedly, the outcome of the litigation is a justifiable reason for the stock’s decreased valuation, but the market may be overreacting to the news. This provides an excellent opportunity for long-term investors to capitalize on the lower price to add this dividend stock to their portfolios.
CarParts.com: An under-the-radar e-commerce disruptor
Jeremy Bowman (CarParts.com): CarParts.com’s revenue soared during the early stages of the pandemic, as the company was at the crossroads of two powerful pandemic tailwinds: e-commerce and auto parts. Consumers looked to online retail as they avoided shopping in stores, and auto parts sales also jumped as consumers took advantage of the extra time on their hands to fix up their vehicles. As a result, CarParts.com, the online auto parts retailer formerly known as U.S. Auto Parts, saw revenue growth nearly double in the fourth quarter of 2020 before decelerating as demand and the pandemic disruption normalized.
Even as pandemic concerns ease, CarParts.com continues to grow its top line by double-digit percentages, taking market share in the industry, and it’s improving its margins on the bottom line as well. In its third-quarter earnings report, revenue rose 16% year over year to $164.8 million, and gross profit increased 19% to $56.1 million. Its adjusted EBITDA also nearly tripled to $6.3 million.
CarParts.com grew its business by adding new warehouses around the country so it can serve most of its customers with two-day delivery. It’s also innovating with a new Do-It-For-Me service where the company is partnering with mechanics around the country who will seamlessly service customers who bring in CarParts.com parts, allowing them to save money as CarParts.com private-labels most of its merchandise, allowing it to undercut competitors on price.
Additionally, the company should benefit from the current economic environment, as high interest rates are making new cars more expensive, encouraging car owners to repair their current vehicles rather than replace them. The auto parts sector also tends to do well in recessionary climates.
Finally, the stock trades at a price-to-sales ratio of 0.6 and just 13 times adjusted EBITDA, making it cheap for a stock with its growth potential.
If the company can continue growing the top and bottom lines, CarParts.com should be a winner from here.
— Jeremy Bowman and Parkev Tatevosian
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Source: The Motley Fool