In the stock market, it is often true that winners tend to keep winning. Strong sales and earnings momentum usually translates into strong returns for shareholders.
On the other hand, there are also big gains to be made by backing high-quality companies that are undervalued due to short-term headwinds that can be overcome over time.
With that in mind, read on to find out why two Motley Fool contributors think investing in these two industry-leading companies would be a smart move while they’re still trading at deep discounts.
A real boon for risk-tolerant investors
Jennifer Saibil: The stock of Carnival (NYSE: CCL) Carnival’s revenue doubled last year and is up this year, but believe it or not, it’s still 74% below its previous record. That may be surprising because its business has rebounded and is above pre-pandemic levels. Carnival is reporting record revenue, strong demand, and improving profitability.
In the second quarter of fiscal 2024 (ended May 31), revenue reached a record $5.8 billion. Operating result Operating net income was $560 million, up nearly 400% from last year, and it posted net income of $92 million, or $0.07 per share.
Demand remains high and customer deposits and booking levels have again reached record highs. The trend towards a longer booking curve and higher prices has continued and total bookings for the remainder of 2024 are the best on record, while bookings for 2025 are at record highs.
So what’s the problem? There are still many indicators that are not up to par with pre-pandemic performance, which is discouraging investors.
Net income was positive in the quarter, but it’s still uneven. But the most pressing issue is debt. Carnival is paying down the huge debt it took on to keep operating when it had no revenue, but it still stands at $29 billion.
The company has $5.7 billion in maturities over the next three years, and it needs to generate enough cash to pay them off. It generated $2 billion in operating cash flow in the second quarter and $1.3 billion in free cash flow, and if it can keep those numbers up, it should be fine.
But it will need to maintain this position over the long term to be able to repay all of its additional debt and have enough cash to operate its business. This implies a fair amount of risk for shareholders at the moment.
That’s why the market continues to price it at a low valuation of just 1x trailing 12-month sales. At that price, and given its excellent performance and potential, it looks like a real bargain for risk-tolerant investors.
Buy Nike Stock After Recent Pullback
Keith Noonan: Even before the publication of Nike‘s (NYSE: NE) According to its latest earnings report, the footwear and apparel leader’s stock had started 2024 on the wrong foot.
Inflation and other economic factors have made consumers more price-sensitive, and weaker demand in key international markets has also weighed on the stock. Signs that the company may take longer than expected to return to solid growth have only added to the bearish sentiment.
Nike shares fell about 20% in trading after reporting its fourth-quarter earnings report for its most recent fiscal year, which ended May 31. The company actually posted significantly better results than the quarter, with adjusted earnings per share of $1.01, which was well above analysts’ average estimate of $0.84 per share for the quarter.
On the other hand, the revenue of $12.61 billion is about $250 million below the average Wall Street target.
Revenue fell 2% in the period, after adjusting for currency exchange rates. Downward pressure on the stock comes on top of management’s forecast for sales to decline about 10% in the first quarter, significantly worse than Wall Street’s expectations. Expectations that the company will continue to face macroeconomic pressures in the U.S. and relatively weak demand in China suggest a bleak outlook for the rest of the year.
Shares are 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 an attractive buying opportunity.
Over the past five years, Nike’s stock price has only briefly been below its current level in 2020, a period marked by a massive market-wide selloff due to the pandemic. With the stock valued at about 20 times trailing 12-month earnings, Nike has never posted a lower earnings multiple in the past five years.
The dramatic price drop has also pushed the company’s dividend yield to an all-time high of 1.9%. The weaker outlook suggests dividend growth could continue at a slower pace 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 a turnaround phase and will likely face sales pressures this year, but the company still has strong infrastructure and distribution networks and is one of the strongest brands in the world. For investors looking for dividend-growth stocks and attractively valued upside stocks, the shares look like a smart buy right now.
Should You Invest $1,000 in Carnival Corp. Right Now?
Before you buy Carnival Corp. stock, consider the following:
THE Motley Fool, Securities Advisor The team of analysts has just identified what they believe to be the 10 best stocks Investors should buy now…and Carnival Corp. wasn’t one of them. The 10 stocks we picked could deliver monstrous returns in the years to come.
Consider when Nvidia I made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $761,658!*
Securities Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building advice, regular analyst updates and two new stock picks each month. Securities Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns as of July 2, 2024
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 a position in Nike 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 position in Nike and recommends Nike. disclosure policy.
2 Stocks Down 74% and 57.5% to Buy Now was originally published by The Motley Fool
