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The S&P 500 rose to a new high on Friday, even after the April jobs report released earlier in the day turned out to be weaker than expected. Investors believe that the big jobs miss could keep the Federal Reserve’s easy monetary policies in place, which have bolstered the stock market’s sharp rebound since the pandemic.
But not everyone is hitting a record.
Over the past few months, investors have pulled back from expensive growth stocks to favor cyclical ones, with many high-flying growth names taking a hit. Thirty stocks in the S&P 500 have plunged at least 20% below their 52-week highs, with most of these in the technology, healthcare, and communication sectors. In the majority of cases, the stocks fell for a good reason: Their valuations surged so much that they no longer justified the stocks’ fundamentals.
This appears to be the case with ViacomCBS (ticker: VIAC) and Discovery (DISCA), both of which recently launched individual streaming services. Investors were excited by the media companies’ ambitious subscriber targets and other bright prospects—and Viacom and Discovery stock were on a tear from March 2020 to March 2021. However, as the stocks’ valuations got loftier and fewer investors were willing to keep chasing them, share prices plunged in late March of this year. Yespite the recent drop, Viacom and Discovery shares are trading at higher valuations—relative to 12-month forward earnings—than they were a year ago, suggesting further room to fall.
Barron’s looked for the opposite: Beaten-down stocks whose valuations have now fallen below year-ago levels, which suggests a better chance for rebound. We narrowed the screen by excluding companies whose 2022 earnings are expected to be lower than those for 2021—a potential red flag for stocks that are running ahead of themselves.
This left us with 10 names that are good candidates to buy on the low.
Consider Etsy (ETSY): The online handicrafts marketplace soared 316% in the 12 months prior to its recent peak on March 1, as it saw a surge in both consumers and sellers during the pandemic lockdowns. The stock has lost one-third of those gains since March 2021, after the company pointed to solid, less dramatic growth in the coming years. Wall Street estimates that Etsy will increase its earnings per share by 20% in fiscal year 2021 from a year ago, and then another 22% in fiscal year 2022.
Similarly, shares of chipmaker Advanced Micro Devices (AMD) have tumbled since peaking in January. In April, AMD increased its full-year guidance as a global shortage of semiconductors placed immense strain on the chip supply chain. The firm now forecasts revenue to grow roughly 50% compared with what it saw in 2020, while earnings are expected to be 66% higher.
From a valuation perspective, both Etsy and AMD are more attractive now than they were a year ago. Penn National Gaming (PENN), Citrix Systems (CTXS), Vertex Pharmaceuticals (VRTX), MarketAxess (MKTX), Incyte (INCY), IPG Photonics (IPGP), Jack Henry & Associates (JKHY), and DexCom (DXCM) round out the stocks included in the screen.
Off the Peak
These stocks have plunged at least 20% below their 52-week highs, and now look cheaper compared to their past valuations.
Source: FactSet
Make no mistake, some of these stocks are still quite expensive in the traditional sense of valuation. They only look “cheap” as compared to their own past—which some might argue is a more relevant way to predict a stock’s future.
For example, shares of DexCom, which manufactures and sells continuous glucose monitoring systems for diabetes patients, are priced at 137 times their estimated earnings in the next 12 months. But investors today no longer just focus on a company’s one-year prospect. The stock is well-positioned to see exponential growth in the next five years as the tech for Dexcom’s products becomes more mainstream. Wall Street analysts are overwhelmingly bullish on Dexcom stock and have an average target price 30% higher than today’s level.
Write to Evie Liu at [email protected]
