When should investors consider buying stocks? Renowned investor Warren Buffett offers valuable insight: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
This advice is essentially the reverse of the fear of missing out (FOMO) principle. When investors all chase after the same stocks, it drives their prices higher. However, Buffett’s strategy revolves around buying stocks at bargain prices, which often means looking closely at unpopular stocks. But it’s important to note that he doesn’t advocate being indiscriminately contrarian. As he wisely puts it, “A contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling.”
In this article, we’ll explore three unloved stocks that have the potential to outperform the market.
1. Sea Limited (NYSE: SE)
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Sea Limited may well be the most unloved stock on our list. It has plummeted by 90% from its all-time high reached about two years ago. During this time, its price-to-sales ratio has plunged by a staggering 94%, dropping from around 30 to less than 2.
While there may be criticisms of Sea’s recent performance, let’s focus on where the company stands today. Sea operates in three segments: video games, e-commerce, and financial technology (fintech). In the second quarter, all three segments were individually profitable, with e-commerce revenue rising by 28% year over year, and fintech revenue surging by 53%.
With a market capitalization of just $21 billion, Sea is in excellent financial shape, boasting $7.7 billion in cash, cash equivalents, and short-term investments. Furthermore, its net profit margin has soared to over 10% as management prioritized profitability. This positions the company to become even financially stronger as it continues to grow.
Additionally, Sea’s e-commerce and fintech operations are still showing healthy growth, and its video game division is indicating signs of recovery, with an 11% quarter-over-quarter growth in active users during Q2.
Investors may have turned their backs on Sea as its growth slowed, but the company is now in a better financial position than ever before. The potential stabilization of its video game business, combined with other segments’ continued double-digit growth, could make Sea Limited a stock deserving of some love.
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2. Williams-Sonoma (NYSE: WSM)
Williams-Sonoma is perhaps the most overlooked stock on this list. Its business, centered around selling cookware, towels, outdoor furniture, and other home goods, may not be the most thrilling, but it’s the cheapest and most profitable among the trio.
In recent years, Williams-Sonoma’s operating profit margin has surged from around 8% to over 15%. Some investors may have been anticipating a reversion to pre-pandemic operating margin levels, which would have made the stock seem cheap. However, in the second quarter, Williams-Sonoma’s operating margin held steady at around 15%, and management forecasts it to remain above 15% for the full year.
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In practical terms, this suggests that Williams-Sonoma is on track to earn more than $1 billion in operating profits annually. Considering its market capitalization is a mere $9.2 billion, it appears quite undervalued relative to its profits.
The company plans to use its robust cash flow for aggressive share repurchases and a dividend yield currently at 2.5%. As the share count decreases, per-share profits are expected to grow, which should lift the stock price. The dividend serves as a cherry on top for value-focused investors.
3. Tripadvisor (NASDAQ: TRIP)
Tripadvisor could be considered the wildcard on this list. While it holds immense potential as the world’s largest travel guidance platform, it has struggled to maintain consistent growth or generate profits over the years, resulting in underperformance compared to the S&P 500.
However, Tripadvisor owns a hidden gem called Viator, a platform that allows travelers to book experiences with local guides worldwide. Viator’s growth is impressive, accounting for 44% of Tripadvisor’s revenue in the second quarter, up from just 17% two years ago.
As Viator continues to gain prominence, Tripadvisor’s overall revenue is growing, with an 18% year-over-year increase in Q2. The company’s profitability is also improving, with $24 million in net income during Q2.
While Tripadvisor has a checkered history, its current growth and profitability, coupled with the potential of Viator in the expanding travel-experience market, make it a stock worth considering.
In conclusion, Sea Limited, Williams-Sonoma, and Tripadvisor are all currently unpopular stocks, but each has compelling reasons to deserve some attention. Among these options, Williams-Sonoma stands out as the least risky choice with a clear path to share price gains, given its strong profits and a history of returning capital to shareholders.
