One is a turnaround, and one is just getting started. Both offer long-term opportunities.
The rise of artificial intelligence is sending many top stocks to new heights, and they’re taking the broader market along for the ride. The S&P 500 is up 16% year to date, and it’s being led by AI-flavored names like Nvidia and Amazon.
The movements of the market are always a balance. Investors love a strong bull market, but an overvalued market makes it harder to find bargains and could lead to a correction. But even at today’s prices, savvy investors can find top stock picks that could lead to wealth creation. Two Fool contributors have some great ideas for you.
Nike is an undervalued turnaround play worth betting on
Keith Noonan: If you’re interested in underappreciated turnaround plays or dividend growth stocks, I think Nike (NKE 1.61%) stands out as a top stock to buy right now. Big sell-offs have pushed the company’s valuation to attractive levels, and its dividend yield sits at a historic high of roughly 2%.
Nike’s share price is now down 32% year to date and 59% from its lifetime high. Of course, there are some very valid reasons behind the company’s dramatic valuation pullback.
Over the last decade, expansion in China was a driving part of Nike’s growth strategy. Between relatively sluggish performance for the country’s economy and rising competition from domestic brands, the U.S.-based footwear and apparel giant’s growth bets on the Chinese market haven’t been paying off lately.
Macroeconomic pressures and competition from emerging rivals have led to headwinds in the U.S. market as well. In particular, the company has lost some market share in running shoes to brands including Hoka, Brooks, and On Holding.
Nike’s last quarterly report and forward performance targets reflect these challenges. In the fourth quarter of the company’s last fiscal year, which ended May 31, revenue came in down 2% year over year — or flat on a currency-adjusted basis. Far more concerning: The company guided for sales to fall roughly 10% year over year in the first quarter of its current fiscal year.
On the other hand, now actually looks like a great time to buy Nike stock for the long haul. Big sell-offs following the fiscal Q4 report have pushed the company’s forward price-to-earnings ratio down to roughly 23.
Even with the business facing significant profit headwinds this year, share price declines have pushed the company’s earnings multiple down to a level that looks very cheap on a historical basis. With the company’s dividend payout ratio sitting at approximately 38%, Nike also has plenty of room for continued distribution growth.
While the company’s near-term business performance is not going to be flashy, long-term investors who take a buy-and-hold approach to the stock at today’s prices could score market-crushing returns.
If you like the coffee, you’ll probably love the stock
Jennifer Saibil: Even though we’re in a new bull market, many stocks that were standouts in the last bull market are still priced well below their previous highs. Dutch Bros (BROS 2.31%) is a young coffee chain that’s growing rapidly, and investors loved its prospects, pushing its stock up to unreasonable valuations soon after its initial public offering (IPO). It’s still a great company with excellent prospects, but now it’s also trading at an attractive price.
Dutch Bros is a coffee chain not unlike Starbucks, but with a bit of a different flavor (sorry, pun intended). Customers like its vibe, which features a fun, relaxed atmosphere, and they also like its lower prices, especially in our inflationary world. Although it’s based in Oregon with a heavy presence on the West Coast, it’s been steadily gaining ground in its journey across the U.S., scooping up satisfied drinkers and making a name for itself.
Although it has nowhere near the clout that Starbucks does, the company is capturing market share and serving a population that may be somewhat disillusioned by Starbucks’ direction these days. Dutch Bros is building its stores with speed and flexibility in mind, and these are some of the most important factors coffee drinkers are looking for in their beverage choices today.
Dutch Bros has been benefiting from this shift. Revenue increased 39% year over year in the first quarter of 2024, and most of that growth is coming from new stores. It opened 45 of those in the quarter and plans for up to 165 for the full year. Bear in mind that Dutch Bros remains fairly small, with just over 800 stores in total. By comparison, Starbucks has over 17,000 U.S. locations. The younger coffee chain can keep expanding at this rate for many years and increase its revenue accordingly.
Comparable sales growth is also picking up steam, implying that happy customers are coming back for more. Same-store sales increased 10% over last year in the quarter. That’s helping spread out fixed costs over a wider base and leading to expanded margins and profits. Net income was $16.2 million in the quarter, up from a $9.4 million loss last year.
Dutch Bros has an exciting concept, and it’s easy to see how this stock could offer value to shareholders for a long time. Dutch Bros stock is down 49% from its all-time highs, but it’s climbing this year, and it has a massive growth runway.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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 Amazon, Nike, Nvidia, and Starbucks. The Motley Fool recommends On Holding and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
