As the growth stock selloff gradually turned into a bear market, many high-quality companies fell sharply despite steadily improving results. Three of these examples — MercadoLibre (MELI 4.21%), The Lovesac Company (TO LIKE 1.65%)and Pool company (BOWL 3.55%) — all are trading at depressed valuations despite revenue growth of 690%, 480% and 120%, respectively, over the past five years.
Growth rates like these, coupled with lower valuations, have the potential to pack a mighty punch for investors. Let’s look at what makes these stocks unique opportunities in a decade today.
1. MercadoLibre: Fintech steals the show
Down 50% from all-time highs, Latin America fintech and e-commerce juggernaut MercadoLibre is a prime example of a stock’s price moving against the tide of its booming operations. Despite the sale amid slowing growth in its commerce segment and increased provisions for its MercadoCredito lending unit, the company posted its highest operating cash flow of $2 billion in the past of the past year.
Powered by 88 million active users, up 12% from last year, MercadoLibre continues to embed itself into the fabric of the Latino community. Accounting for more than 20% of gross online merchandise volume (GMV) in Latin America, the company’s commerce segment grew 33% despite the reopening of brick-and-mortar retail in the region.
However, as impressive as this e-commerce foothold is, MercadoLibre’s fintech unit (MercadoPago) aims to become the company’s core segment. With 115% revenue growth in the third quarter, MercadoPago now accounts for 46% of revenue and has 42 million unique fintech users.
With 70% of Latin America’s population still unbanked or underbanked, according to Forbes, MercadoLibre’s fintech growth may be just beginning. In addition, 72% of MercadoPago’s total payment volume (TPV) comes from outside its market. This figure shows that its digital wallet and payment capabilities go well beyond sales on its platform, providing the company with additional growth avenues to explore.
More importantly for investors, this upside potential comes when MercadoLibre’s valuation is at a decade low.
In the case of MercadoLibre, the operating cash flow per share gives a better insight into the valuation of the company because it spends a lot on capital expenditure, which weighs on its free movement of capital.
With only 23x cash from operations, MercadoLibre’s 61% revenue growth rate, steady advancements in e-commerce and massive fintech potential make it a unique opportunity for investors.
Lovesac: 45% sales growth but zero price
While the home furnishings industry and the once-in-a-decade buying opportunity rarely end in the same sentence, Lovesac’s dual growth and low valuation can make it happen.
The company has posted 480% revenue growth since its initial public offering (IPO) in 2018, so one can imagine that its stock has done relatively well over the same period. Instead, however, its stock price is almost exactly where it was when it went public.
Well, that’s fine, you may think. This is likely another sold growth stock that continues to post massive net profit losses. Yet that’s not the case either, as earnings per share (EPS) turned positive during the pandemic and never looked back.
Now trading at just 8x earnings, Lovesac’s low valuation has the potential to act as a charged spring sending its stock price skyrocketing.
Crucial as this cheap valuation may prove to investors, Lovesac’s growing customer base and eco-friendly “sactionals” (sofa pieces that can be arranged in different ways) provide additional excitement for investors.
With sactionals accounting for 87% of the company’s sales, Lovesac could rebrand itself as “The Sactional Company” as its bean bag products now account for just 11% of revenue. Regardless, these modular sactionnels have continued to grow in popularity as their reconfigurability and optional accessories (seat tables, cup holders, coasters, etc.) make them endlessly customizable.
Further adding to Lovesac’s growing popularity among younger generations, 100% of its padded fabric comes from repurposed plastic bottles. With the standard configuration of the sactional pit using nearly 1,000 plastic bottles, the company’s products are not only loved by customers, but also a net positive for the world.
Sporting a strong customer lifetime value of $2,880, compared to a customer acquisition cost of $549, Lovesac’s tiny valuation and growing number of customers make it a compelling contender for the starting position with a multi-bagger potential.
Pool: a calm activity with recurring income
As the #1 distributor of pool products in the world, Pool stock has generated total returns of over 700% in the past decade alone. Over the past 20 years, those returns have jumped to more than 3,800%, making the company a 37-bagger for its shareholders over that time.
Leading this incredible rise for Pool are its stable operations designed to thrive whether the housing market is booming or cooling. 58% of its sales come from recurring sources, such as maintenance supplies that must be purchased no matter what.
In addition to this steady influx of sales, an additional 22% of purchases come from replacement and refurbishment services, which the company calls “semi-discretionary.” These predictable sales create a wonderful floor for Pool in tough times, reducing the boom or bust nature of the real estate cycle.
The shares now trade at just 16 times earnings, and that cheap valuation has caught management’s attention. With a history of discounted stock buybacks, Pool is back, buying back nearly $500 million in stock over the past year.
With a dividend yield of 1.2% and a tiny The payout ratio 18%, the company also has plenty of leeway to increase its dividend.
Pool continues to prove itself as a master at returning money to shareholders. Trading well below its lowest price-earnings ratio in this decade, Pool’s steady growth looks like a unique opportunity for growth and income investors.