Contrarian investing is hard. It is difficult to go against the crowd. Stocks at 52-week lows are companies the stock market harshly rejects. By diving into the shallow end of the pool, it requires fortitude to believe conventional wisdom is wrong about a company. The market is saying the business is failing and has little hope of redemption. A contrarian investor says they are mistaken.
While buying such deeply discounted stocks can generate significant wealth when you are proven right, you just can’t be haphazard in your actions. It takes a careful review of the company to ensure it does have the resources and wherewithal to turn its business around.
Still, scanning stocks at 52-week lows is a great place to begin your search for undervalued investments. The three stocks below are at or very near their lowest point in the past year. Let’s see which, if any, are worth buying today.
Five Below (FIVE)
Teens and tweens retailer Five Below (NASDAQ:FIVE) just hit rock bottom. The stock tumbled 15% the other day falling to $85 per share after its president and Chief Executive Officer (CEO) resigned. Five Below’s second quarter is not going well as the lower-income consumer is cutting back on discretionary spending.
As of today, share price is at $75.57. Five Below stock now trades at levels last seen during the pandemic. You have to go back to 2018 to find a comparably low price of its stock absent the unique circumstances of 2020.
Also, the retailer updated its Q2 progress saying sales were up 10% compared to last year for the first 10 weeks of the period. Same-store sales were down 5%, and it sharply reduced revenue guidance for the quarter.
Previously Five Below expected sales in the range of $830 million to $850 million. But now, forecasting is closer to $820 million to $826 million. Comps will be down 6% to 7%, too. Earnings were also cut back to 53 cents to 56 cents versus the 57 cents to 63 cents range it previously guided towards.
It sounds like a deteriorating situation but location analytics firm Placer.ai found store traffic in May had increased 18.6% year-over-year (YOY). It suggests consumers still find Five Below’s value attractive. Yet, it is not time to back up the truck. It’s not even time to pull into the parking lot. While I believe FIVE stock still has long-term potential, now is not the time to buy.
Dollar Tree (DLTR)
Deep discount chain Dollar Tree (NASDAQ:DLTR) is also suffering from the same effects as Five Below. Inflation may have ticked lower setting up possible interest rate cuts but the cumulative four-year toll of higher prices is hurting those consumers who can least afford it. It is hurting Dollar Tree, too.
Because of its low fixed-price business model, higher costs eat away at margins. Dollar Tree stock is down 27% in 2024 and 30% lower over the past year. Shareholders actually haven’t seen any gains in over five years. While DLTR trades for 13 times next year’s earnings estimates and at just a fraction of sales, the market has soured on the deep discounter. More competition at the lower price point level from large discount retailers has increased pressure, especially on its long-ailing Family Dollar chain.
The retailer, though, still has a bright, long-term outlook. Although higher labor costs from rising minimum wage costs hurt and tariffs on China impede progress, Dollar Tree is winding down its investment in the poorly thought-out Family Dollar acquisition from 2015. It is also expanding merchandise in its mixed-price model in the $3 and $5 range, even as that brings more competitive pressure.
Because the retailer still has more room for store growth, it can eventually enjoy margin expansion from cost savings on its supply chain. And shedding underperforming stores will help its bottom line. DLTR stock is a turnaround play that may take time to work out, but its deep discount valuation matches its product offerings. I might not back up the truck here. Maybe a small trailer would be sufficient.
Diageo (DEO)
Alcoholic beverage stock Diageo (NYSE:DEO) might not be a household name but there is a good chance you have a few of its spirits in your liquor cabinet. It owns Johnnie Walker scotch whiskey, Crown Royal Canadian whiskey, Ciroc vodka, Captain Morgan’s rum and Guinness beer.
Diageo stock hit its 52-week low earlier this month but has since bounced 5% higher. It still trades at a level not seen since 2017 (excluding the pandemic period). As there is a disconnect between its stock and its growing business, shares of DEO represent a unique opportunity to buy this global spirits company at a discount.
Management continues to follow the premiumization trend in the industry, owning some of the best top-shelf brands. It can also benefit from industry consolidation. Spirits are highly fragmented beyond the handful of top players that dominate the market.
Acquisitions give Diageo the chance to enhance its portfolio from both transformative deals and bolt-on purchases. Organic first-half 2024 sales were up 1.5% while it generated $1.5 billion in free cash flow. Also, the spirits giant increased its dividend 5%, giving it a 25-year track record of raising its payout.
Diageo is the type of stock contrarian investors seek out when going against the grain. Expect shares to make a U-turn and move higher once again. If there is one stock to back the truck up to, it is Diageo.
On the date of publication, Rich Duprey did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.