Are you in the market for oversold consumer stocks? You should be.
According to a Financial Times article from late July, investors have shunned consumer stocks over recession fears, which means there are opportunities to be had in this downtrodden segment of the market.
The Financial Times went on to report:
“‘There’s a complete lack of conviction around a cyclical recovery,’ said Savita Subramanian, equity and quant strategist at Bank of America. ‘The only [demand] we’re seeing is for secular growth themes like artificial intelligence.’”
According to Finviz.com, 44 S&P 500 stocks were down more than 20% in 2023. Of those, 10 are what you would consider oversold consumer stocks. If you broaden the search to consumer stocks with market capitalizations of $2 billion or more, there are 26, providing a few more potential ideas.
Looking at the 26 names, there are a lot of interesting possibilities. Here are the three I’ve honed in on as good buy-on-the-dip moves.
Planet Fitness (PLNT)
Planet Fitness (NYSE:PLNT) closed Aug. 23 down nearly 23% on the year.
You don’t have to be a genius to know why its stock is losing ground in 2023. The pandemic ended, and everyone thought things would return to normal in the fitness industry. However, the ravages of inflation got consumers far more selective about how they spent their money.
What are you going to do? Forgo food in your fridge so you can pump iron every day? I have nothing against working out, but expenses must be cut when the dollars get scarcer. For most people, that’s low-hanging fruit.
The stock’s most recent slide came after announcing Q2 2023 earnings on Aug. 3 before the markets opened.
The big fly-in-the-ointment: The company lowered its guidance for the rest of the year due to higher costs. Between higher construction costs for new store openings and higher interest rates on equipment for its new stores, it has no choice but to slow store openings from 160 down to 140.
Interestingly, despite what I said about cutting spending, it isn’t happening. It’s passed pre-pandemic levels of customers, those rejoining are doing so faster, and it’s got eight straight quarters of lower year-over-year cancellation rates.
Translation: You’ve got another chance if you missed its run from $55 in September 2022 to $85 in January.
Driven Brands Holdings (DRVN)
In the case of Driven Brands Holdings (NASDAQ:DRVN), the parent of automotive service brands such as Maaco and Meineke, I suggested in June that it might be a good name to consider because people are keeping their cars and trucks longer, leading to increased repairs.
Unfortunately, it reported earnings on Aug. 2, including a downward revision in its full-year revenue and profits. Its share price cratered, losing 41% of its value.
The quarter itself wasn’t half bad — a 19% increase in revenue and a 12% jump in increased earnings before taxes, depreciation and amortization (EBITDA) — but investors weren’t having any of its revisions.
Can you blame them?
It announced a $50 million drop in 2023 expected revenue, a $55 million decline in projected EBITDA, and a 29-cent revision in earnings per share. Before it announced its Q2 2023 results, it traded at 21.3x earnings. It’s now 16.0x earnings. A 32% reduction in its projected earnings has resulted in a 33% drop in its multiple.
The market is the ultimate judge.
That said, aggressive investors won’t regret buying this asset-light business at prices not seen since it went public in January 2021.
Tootsie Roll Industries (TR)
I last wrote about Tootsie Roll Industries (NYSE:TR) in 2017 when I suggested investors would love to see it merge with Hershey (NYSE:HSY). At the time, Tootsie Roll was run by 86-year-old Ellen Gordon, the wife of Melvin, who ran the company from 1962 to his death in 2015.
Of course, Hershey never came calling; Ellen remains CEO at 91. Is she Warren Buffettesqe? Probably not, but anything’s possible when you control the voting shares. Usually, I’m all for grey-haired management, but Gordon takes it a tad too far. A non-executive chairman is appropriate, given her age.
But I digress.
Tootsie Roll stock is down more than 22% in 2023. Over the past five years, it’s up 29%. That sounds great until you realize that it’s not quite half the index’s return over the same period.
In the most recent quarter, Tootsie Roll’s revenues were $158.8 million, 12% higher than a year ago, with a 24% year-over-year increase in earnings per share to $0.21.
There is no question that business remains strong. So, the question is why its stock is down 22% over the past eight months.
I can give you a big reason: its marketing is from the 1920s. Nonetheless, given its sales and earnings growth, its stock is cheap under $35.
On the date of publication, Will Ashworth 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
