After over a decade of smooth sailing, stocks have been exceptionally turbulent for the past three years. Rising rates, high inflation, recession fears – you name it, and the bears have used it to maul share prices across the board. However, I believe there is a silver lining amidst the carnage. The recent market downturn has left many high-quality companies trading at stunning discounts, offering patient investors a rare chance to grab these stocks near cyclical lows and aim for quadruple-digit returns over the next five years.
Of course, with such an ambitious goal, risks are greatly amplified, too. The companies featured in this article are at significant inflection points in their strategic roadmaps, and require strong execution and some luck with macro tailwinds to unlock four-digit upside. I have selected stocks where I believe the companies’ underlying business momentum remains strong despite near-term headwinds, and the leadership teams have previously demonstrated their ability to steer through challenging environments.
In the current doom and gloom environment, it’s easy to forget that a few years of patience and holding your nerve through volatility can set you up for life-changing wealth creation. My goal in this article is to highlight three such beaten-down stocks that I believe could potentially return 10x over the next five years. These companies operate in sectors facing temporary issues, but their long-term outlooks remain strong. With valuations depressed and prospects still bright, these stocks offer a tempting risk-reward for investors with the stomach to withstand turbulence.
JAKKS Pacific (JAKK)
JAKKS Pacific (NASDAQ:JAKK) has weathered its fair share of challenges in the toy industry over the past decade. From my perspective, it seemed like the company’s glory days were long gone as mobile devices and video games disrupted traditional play. JAKK stock crashed from $307 per share in 2007 to a pandemic low of $3 in 2020 as sales and profits evaporated. However, to my surprise, this toymaker staged a stellar comeback. The stock trades around $31, delivering ten-bagger returns over the past three years.
In my opinion, behind the scenes, JAKK adapted itself to evolving consumer preferences. It entered into smart partnerships with the likes of Disney (NYSE:DIS), Nickelodeon, and Cocomelon to leverage these popular brands in its portfolio.
Financially, JAKK has also made enormous strides. Despite revenue declining 4%, margins expanded notably. As a result, profits now sit at decade highs, even with lower sales. In my view, JAKK has embraced technology shifts through licensor tie-ups and geographical diversification, all the while boosting profitability. This makes the company poised for sustainable growth.
Trading at 6-times forward earnings, I believe JAKK stock offers explosive upside for patient investors. As the company improves execution, profitability could scale further. Over the next five years, robust sales growth also seems likely amid trendy product launches. This turnaround story could potentially return ten-bagger profits, if the stars align on multiple fronts.
Zymeworks (ZYME)
Vancouver-based biotech Zymeworks (NASDAQ:ZYME) develops novel bispecific antibody therapeutics in the complex and rapidly-evolving oncology space. The stock has been essentially flat since 2022.
Zymeworks’ lead pipeline candidate is zanidatamab, a HER2-targeting bispecific antibody for multiple cancers like breast, gastric, and biliary tract cancers. So far, data from several clinical studies underscore zanidatamab’s promising efficacy and safety profile. At the latest ESMO conference, updated results from a showed “meaningful clinical benefit.” On the regulatory front, zanidatamab also received FDA Breakthrough designation back in 2020.
Considering the high unmet need and zanidatamab’s differentiated mechanism of action, further positive data could pave the pathway for expedited approvals. With potential initial launches soon, zanidatamab may emerge as a new standard of care in areas like first-line gastric cancer and transform outcomes for patients. If clinically-meaningful revenues materialize, ZYME stock could ride higher growth tailwinds and stage a multi-bagger rebound from today’s lows.
In my opinion, ZYME stock offers an appealing risk-reward setup at current levels, trading at a modest valuation of $623 million, with cash projected to last several years.
Azul (AZUL)
Brazil’s largest domestic airline, Azul (NYSE:AZUL), has faced extreme difficulties over the past few years as COVID has wreaked havoc on travel demand. In fact, AZUL stock crashed from $44 in early 2020 to a low of $4.16 at its trough before recovering to around $11 per share today. While some turbulence may remain over the near-term, I believe Azul’s strong competitive positioning and Brazil’s attractive air travel growth prospects make this an enticing opportunity.
Azul built a leading domestic network covering over 105 destinations. Despite macroeconomic struggles, resilient travel demand and disciplined capacity growth drove Azul’s revenue up 24% year-over-year in Q3 2023. The company’s EBITDA also hit a record $252 million, well above pre-pandemic levels. Azul expects full recovery by mid-2024 on rapid fleet modernization and business expansion.
Moreover, I believe Azul possesses key structural advantages like the lowest costs and highest average fares in its markets, which augur well for sustained profitability. The company’s balance sheet clean-up and the shaving down of long-term debt to $1.4 billion further strengthened its financial position. Given its low current penetration, as Brazil’s economy recovers and middle-class disposable incomes rise, air travel is ripe for a boom.
I anticipate Azul’s earnings and cash flows will inflect substantially higher over time. Trading at just 0.3-times sales and 11-times forward 2025 earnings, AZUL stock appears primed for an ambitious multi-bagger ascent as profits take flight.
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On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
