In the stock market, winners tend to keep winning. Strong sales and earnings momentum usually translates into strong shareholder returns.
On the other hand, it is also possible to make big profits by backing high-quality companies that are underestimated due to short-term headwinds but can be overcome over time.
Keep that in mind and read on to see why two Motley Fool contributors think investing in these two leading companies would be a smart move while they’re still trading at deep discounts.
A real bargain for risk-tolerant investors
Jennifer Saibil: The stock of Carnival (NYSE: CCL) doubled last year and is up this year, but believe it or not, it’s still 74% below its previous high. That may be surprising, because business has rebounded to exceed pre-pandemic levels. Carnival is reporting record revenue, high demand and improving profitability.
In its fiscal second quarter of 2024 (ending May 31), revenue was a record $5.8 billion. Operating income was $560 million, up nearly 400% from a year ago, and it posted net income of $92 million, or $0.07 per share.
Demand remains high and there were again record deposits and booking levels from customers. The trend of a longer booked curve at higher prices has continued and the total booked position for the remainder of 2024 is the best ever, while there are record bookings for 2025.
What’s the catch? There are still quite a few metrics that are lagging behind pre-pandemic performance, and that’s scaring off investors.
Net income was positive in the quarter, but that’s still inconsistent. But even more pressing is the debt. Carnival is paying down the massive debt it incurred to stay in business when it had no revenue, but it still stands at $29 billion.
It has $5.7 billion in debt payments over the next three years and it needs to raise enough cash to pay those off. It had $2 billion in cash from operations in the second quarter and $1.3 billion in free cash flow and if it can sustain those numbers it should be fine.
But it has to hold out for a long time to pay off all the extra debt and still have enough money left to run its business, which at this point poses a significant amount of risk to shareholders.
Therefore, the market is still pricing it at a low valuation of just 1x trailing 12-month sales. At this price, and with its excellent performance and potential, it looks like a bargain for risk-tolerant investors.
Buy Nike stock due to recent pullback
Keith Noonan: Even before the publication of Nike‘S (NYSE: NKE) Shares of the footwear and apparel leader had already started 2024 on the wrong foot, according to its most recent earnings report.
Inflation and other economic factors have made shoppers more price-sensitive, and weaker demand in key international markets also weighed on the stock. Signs that it could take longer than previously expected for the company to return to solid growth have only added to the pessimistic sentiment.
Nike shares fell about 20% on the day of trading after the release of its earnings report for the fourth quarter of its most recent fiscal year, which ended May 31. The company actually posted a significant profit win in the quarter, with adjusted earnings per share of $1.01, which was well ahead of analysts’ average estimate for earnings per share of $0.84 in the quarter.
Revenue of $12.61 billion, however, fell about $250 million short of the average Wall Street target.
Revenue fell 2% year-over-year on a currency-adjusted basis in the period. Adding to the negative pressure on the stock was management’s forecast for a revenue decline of around 10% in the first quarter, which was significantly worse than Wall Street’s forecast. Expectations that the company will continue to face macro pressures in the U.S. and relatively weak demand in China point to an uninspiring outlook for the remainder of the year.
Shares are now down about 31% year-to-date and 57.5% from their all-time high. While it’s clear the company is facing headwinds, the recent pullback likely presents a valuable buying opportunity.
Over the past five years, Nike’s stock has only briefly dipped below current levels in 2020, a period marked by a massive market sell-off due to the pandemic. With the stock trading at about 20 times earnings over the past 12 months, Nike hasn’t traded at a lower earnings multiple in five years.
The dramatic sell-off has also pushed the company’s dividend yield to 1.9%, the highest ever. The weaker outlook suggests dividend growth could slow in the near term, but Nike has still increased its dividend by about 68% over the past five years and 208% over the past decade.
Nike is in turnaround mode and will likely face selling pressure this year, but the company still has strong infrastructure and distribution advantages and one of the strongest brands in the world. For investors looking for dividend growth stocks and attractively valued comeback plays, the shares appear to be a smart buy right now.
Should You Invest $1,000 in Carnival Corp. Now?
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Jennifer Saibil has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Carnival Corp. and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
2 Stocks Down 74% and 57.5% to Buy Now was originally published by The Motley Fool
