In recent days, the stock market has seen a rise, reaching new heights for some companies. However, not all companies are experiencing the same level of success. A shift in investor preferences has led to a decline in expensive growth stocks, with a particular focus on cyclical stocks. As a result, many high-growth companies in sectors such as technology, healthcare, and communication have suffered setbacks. The primary reason for this decline is the overvaluation of these stocks, which no longer aligns with their underlying fundamentals.
Two companies that exemplify this situation are ViacomCBS (VIAC) and Discovery (DISCA). These media giants recently launched their own streaming services, garnering significant excitement among investors. Both stocks soared from March 2020 to March 2021. However, as their valuations became increasingly inflated and investor interest waned, share prices plummeted in late March of this year. Despite this recent drop, Viacom and Discovery shares still boast higher valuations compared to a year ago, presenting the possibility of further decline.
In contrast, our attention was drawn to undervalued stocks whose valuations have fallen below their levels from a year ago. This indicates a potential opportunity for a rebound. To refine our search, we focused on companies whose projected earnings for 2022 were expected to surpass those of 2021. This filter helped us avoid stocks that may be performing beyond their actual potential.
Following this criteria, we identified ten promising candidates that appear to be attractive options for low-cost investments.
The Rise and Fall of Etsy and AMD Stocks
In the past year, Etsy, the online handicrafts marketplace, experienced an astonishing surge of 316%. This surge was primarily driven by the increased number of consumers and sellers during the pandemic lockdowns. However, since March 2021, the stock has lost one-third of its gains due to the company's announcement of solid yet less dramatic growth in the future. Despite this setback, Wall Street predicts that Etsy will still achieve a 20% increase in earnings per share in fiscal year 2021 compared to the previous year, followed by another 22% increase in fiscal year 2022.
A similar story can be seen with chipmaker Advanced Micro Devices (AMD). After reaching its peak in January, the stock has taken a hit. Nevertheless, in April, AMD revised its full-year guidance due to a global shortage of semiconductors, which has put significant strain on the chip supply chain. The company now anticipates a revenue growth of approximately 50% compared to its 2020 achievements, with earnings expected to be 66% higher.
From a valuation perspective, both Etsy and AMD are now more attractive than they were a year ago. Aside from these two stocks, the screen also includes Penn National Gaming (PENN), Citrix Systems (CTXS), Vertex Pharmaceuticals (VRTX), MarketAxess (MKTX), Incyte (INCY), IPG Photonics (IPGP), Jack Henry & Associates (JKHY), and DexCom (DXCM).
It is essential to note that some of these stocks may still carry a hefty price tag when compared to traditional valuation metrics. However, their current valuations seem "cheap" when compared to their own past performance. This perspective suggests that examining a stock's historical trend may be a more relevant way to predict its future potential.
For instance, DexCom, a company specializing in continuous glucose monitoring systems for diabetes patients, currently has shares priced at 137 times their estimated earnings for the next 12 months. While this may seem expensive, investors now consider the company's long-term prospects rather than solely focusing on its one-year outlook. DexCom is expected to experience exponential growth over the next five years as its technology becomes more mainstream. Wall Street analysts share a bullish outlook for DexCom stock and have set an average target price that is 30% higher than its current level.
In conclusion, both Etsy and AMD have faced recent setbacks, but analysts remain optimistic about their future performance. As the market continues to evolve, it is crucial to consider a stock's historical trajectory and long-term potential when making investment decisions.
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