Investors have suffered painful declines in recent months. the Nasdaq and S&P500 have approached or entered bearish territory at various times, and many top growth stocks have lost more than three-quarters of their value.
However, the silver lining in this situation is that many companies have entered value stock territory. Given these discounted prices, investors may consider Amazon (AMZN 0.19%), Wholesale BJ’s (BJ 7.43%)and netflix (NFLX 3.55%).
Admittedly, referring to Amazon as a “highest value stock to buy in May” might sound odd. Long a high stealer, it has spent years maintaining price-to-earnings (P/E) ratios well above 100. However, a temporary slowdown in online sales growth as well as challenges in the supply began to hammer Amazon shares, taking the P/E. E ratio reduced to 55.
Additionally, net sales of $116 billion for the first quarter were up only 7% year-over-year. It also posted a net loss of nearly $4 billion, as higher operating and non-operating expenses of $8.6 billion weighed on revenue.
Moreover, the company offered little hope for the immediate future as it forecast between 3% and 7% net sales growth for the second quarter. The company attributes the slowdown to inflation, supply chain constraints, uncertain customer demand and other issues.
However, many of these conditions are likely temporary. Grand View Research forecasts a compound annual growth rate (CAGR) for e-commerce of 15% through 2027, growing the industry to $27 trillion that year. Such predictions bode well for the e-commerce giant.
More importantly, retail behavior has little effect on its earnings growth engine, Amazon Web Services (AWS), which generated $6.5 billion in operating profit in the first quarter. This cloud service could attract investors who have seen the stock drop around 40% from 52-week highs. As the company strives to revive growth in its retail business, the cloud segment could help revive Amazon’s stock.
2. Wholesale BJ
BJ’s has long served the East Coast states as a warehouse retailer. Despite its longevity, competitors such as Costco and walmart‘s Sam’s Club eclipsed his performances.
However, it revived after one of the most unlikely events: the pandemic. The demand for groceries has boosted his income. Although growth rates have slowed since the US reopened, they have held on to their gains and used that extra revenue to pay down debt and fund expansion. Over the past two years, it has expanded into Ohio and Michigan and plans a location in Tennessee, outside of its base on the East Coast.
In fiscal 2021 (which ended January 29, 2022), it generated $16.7 billion in revenue, 8% more than the previous year. This led to adjusted net income of $449 million, a 4% increase over the same period. Faster increases in cost of sales and selling, general and administrative expenses reduced its earnings growth. Like most other retailers, frayed supply chains and rising labor costs have weighed on the business.
BJ forecasts a single-digit revenue increase for fiscal 2022. While this represents some downturn, the stock has risen more than 40% in the past year, at a time when the S&P 500 was flat. And while its earnings multiple has risen to 20, that’s well below Costco at 40 times earnings and Walmart at a P/E of 30. That low valuation and expansion plans could help it to stand out from other warehouse retailers.
Netflix is another unique growth stock that is now selling into value stock territory. Its current P/E ratio of 17 is well below the earnings multiples of over 100 that it has often sustained after turning profitable.
Netflix has become a growth stock by pioneering the media streaming industry. Its platform led to the demise of the video rental industry, as consumers could view movies at their convenience without leaving their homes.
Moreover, with its low cost, consumers have increasingly abandoned more expensive cable TV packages. Even at $15.49 per month for the standard plan, that’s only a small fraction of the $217 average price for a cable plan, according to DecisionData.org. Additionally, as competitors began to emerge, Netflix shifted its focus to proprietary content, and some of its programs won critical and audience acclaim.
However, as content developers such as disney and World Paramount entered the streaming market, subscriber growth slowed and eventually turned negative. This appeared in the latest earnings report. In the first quarter, paid memberships fell by 200,000 from the previous quarter to 221.6 million, and the company expects net additions to decline by 2 million sequentially in the second quarter. This news caused the stock to drop 35% the day after the results were announced.
First quarter revenue of $7.9 billion increased 10% from the prior year quarter. However, net income fell 6% to $1.6 billion during this period due to rapidly rising operating expenses and income taxes.
Still, free cash flow reached $802 million, 16% higher than 12 months ago. Additionally, analysts expect revenue growth to remain in the high numbers through next year. At the aforementioned 17 P/E ratio, such increases could make Netflix an attractive value investment.