2023 is here, and the bear market is showing signs that it might be about ready to go back into hibernation. Some beaten-down stocks from 2022 are especially on a tear as investors start sifting through the rubble for a good deal.
As they eye the potential for a new bull market, three Fool.com contributors think RH (RH -2.19%), Skyworks Solutions (SWKS -0.30%), and Jabil Circuit (JBL -1.17%) are still undervalued and have lots of growth potential. Here's why they think investors should really pay attention to these great businesses.
Billy Duberstein (RH): There have been a few recent developments that portend a potential turnaround in the stock of luxury furniture retailer RH, which is part of the portfolio held by Warren Buffett's Berkshire Hathaway.
The housing market, which went into a deep freeze in 2022, has recently showed signs of thawing. The January National Association of Home Builders/Wells Fargo Housing Market Index showed the first month-over-month sentiment increase in over a year. That actually defied analyst expectations of another slight decline.
Sure, the index is still in "negative" territory at 35 -- down from 83 a year ago -- but with housing-related stocks massively down, and with all three index components (sales, sales expectations, and buyer traffic) showing improvement, there's a possibility that housing stocks and home furnishing retailers like RH may be bottoming.
The positivity was corroborated by online brokerage Redfin CEO Glenn Kelman, who tweeted on Jan. 25:
... we believe the market, while still fragile, is recovering... In the second week of November, the number of people going on their first home tour with Redfin agents was down 33% year over year. By the third week of January, it was still down, but by about half that amount: 19%.
RH's business is tightly tied to the housing market. In fact, on the third-quarter conference call with analysts in December, RH CEO Gary Friedman mentioned the word "housing" 40 times. He said:
Our business is tied to the housing market because if you look at our business, it's tied to events. Someone bought a new home, they're remodeling a home, or they are redecorating their home. ... our business is tied to those three things.
While it's possible there could be a double-dip downturn, if the housing market is beginning to find its footing, that's a great sign for RH shareholders. The stock has sold off 58% from its 2021 high and trades at just 11 times earnings while the company is on the brink of a large brand expansion, both internationally and into other nonfurniture products.
Data by YCharts.
This year, the company is planning the grand opening of RH England at Historic Aynhoe Park, a 16th-century, 73-acre estate in the English countryside -- RH's first overseas design gallery. The opening was supposed to happen last year but was delayed to 2023. In addition, RH opened up its first boutique hotel, called the RH Guesthouse, in New York late last year.
If the housing market recovers, RH's core furniture business should as well. That might accelerate Friedman's ambitious plans to make RH an internationally known high-end luxury brand across multiple products and services -- plans that were interrupted in 2022.
Don't let a double-digit jump keep you away from this chip stock
Nicholas Rossolillo (Skyworks Solutions): When I talked about chip designer and manufacturer Skyworks Solutions last month, shares were nearly 20% lower than they are now. But the company still trades at a value price.
Skyworks stock can be purchased for 14 times trailing-12-month earnings, or just under 20 times trailing-12-month free cash flow.
Now, there is a caveat to this price: Like other chip companies with exposure to consumer electronics, Skyworks is in the midst of a cyclical slump. Households simply aren't buying nearly as many PCs, laptops, and smartphones as they were a year ago.
Just over half of Skyworks' revenue comes from Apple -- a customer-concentration risk that management is still working on mitigating, but nonetheless an acceptable problem at the moment, given that demand for iPhones and other Apple products remains strong. Skyworks also has other customers, but falling sales will likely impact earnings for the next quarter or two.
In other words, this stock's valuation could get worse in the first half of 2023 before growth picks back up.
However, don't underestimate the company's new infrastructure and automotive (I&A) segment, which is reportedly holding up quite well as the auto industry migrates to electric drivetrains and progressively crams more driver-assist systems in every subsequent year's refreshed models. In fact, as many consumer electronics segments slump, other chip companies have been saying in recent weeks that automotive end markets are still doing just fine.
It's a small business right now, but I&A could expand in dramatic fashion in the coming years, providing another secular growth trend for Skyworks in addition to 5G mobile networks. Along the way, Skyworks can use its robust profitability to pay a modest dividend (shares currently yield around 2.3%) and repurchase stock. The stock could be an epic winner during the next bull market.
Rising stock price; skyrocketing earnings
Anders Bylund (Jabil Circuit): Let's talk about one tech stock winning in this challenging market: Jabil. The electronics design and manufacturing specialist has seen its stock price rise roughly 30% over the past year, while the Nasdaq Composite and S&P 500 indiceshave posted losses of 16% and 8%, respectively, in the same period.
The Tampa Bay-based company serves customers in a variety of industries, including healthcare, telecom, and automotive. Manufacturing operations are sprinkled across more than 100 facilities in 30 countries. It also offers services like prototyping, supply chain management, and final assembly of shelf-ready products.
And here's the thing: Jabil's stock is chronically undervalued, and only more so in recent years -- despite the rising stock price.
The share price is up more than 80% in three years, but trailing adjusted earnings grew by 385% over the same span. As a result, Jabil's price-to-earnings ratio dropped from 24 to 11.
Data by YCharts.
If that's what Jabil can achieve during the coronavirus pandemic and its many market-moving side effects, imagine what the company can do when the economy's back to peak health.
Normally, a surging stock price might suggest that you had missed the boat. With Jabil, the shares have gotten cheaper over time, even as the basic stock price increased. The stock is still waiting in port, giving you another chance to pick up shares at a penny-pinching valuation today.
