It’s been a volatile year for the major market averages, and the S&P-500 (SPY) has now corrected over 27% from its highs, suggesting we’ve seen the majority of the downside short-term.
This is based on the average recessionary bear market coming in at 34% and the S&P-500 now satisfying 80% of the average decline’s magnitude.
One of the most beaten-up areas of the market has been growth stocks, and with elevated pessimism finally increasing the likelihood of a short-term market bottom, this is the ideal time to be hunting for new ideas.
Unfortunately, not all stocks are created equal. While many growth stocks might be oversold, those still posting net losses per share and carrying high debt levels are extremely risky in a rising-rate environment.
However, for investors willing to dig through the rubble, two names stand out as extremely attractive, trading at significant discounts to fair value despite boasting strong earnings trends. In this update, we’ll look at two stocks that are solid buy-the-dip candidates:
Boot Barn (BOOT)
Boot Barn (BOOT) is a small-cap growth stock in the Retail/Apparel industry group that has enjoyed near triple-digit sales growth, increasing revenue from $180MM in fiscal Q1 2020 to $299MM in fiscal Q1 2023.
This has been accomplished by industry-leading same-store sales growth rates and continued unit growth (73 new stores opened), which is supported by the company’s continuously improving unit economics. For example, the company’s average sales per square foot have improved from a prior target of $170/square foot to over $400/square foot, increasing its payback period from three years to one year for new stores.
At the same time as sales have continued to increase at double-digit levels and it’s grown its store count to 330, the company has enjoyed growth in exclusive brand penetration, providing a significant boost to annual earnings per share.
This is because its private-label brands carry much higher margins, allowing BOOT to nearly quadruple annual EPS from FY2020 to FY2022 ($6.18 vs. $1.55). These are phenomenal growth rates, and with plans to grow its store count by over 12% this year, this growth story is still in its early innings.
Unfortunately, the stock has been crushed year-to-date (down 56%) due to the negative sentiment for the Retail Sector (XRT) and the company’s lukewarm comments in fiscal Q2 2023 guidance.
However, it’s important to note that while Boot Barn’s inventory levels were up and same-store sales decelerated, it has less of a discretionary tilt to its business than its peers. This is because many of its categories are functional and include work boots, work apparel, and men’s Western apparel).
So, while Boot Barn’s sales will be impacted by shrinking discretionary budgets among consumers, I expect it to be more insulated than some of its more discretionary peers.
The good news for investors who were patient to stay on the sidelines is that even if fiscal Q2 2023 results do show deceleration, considerable negativity is already priced into BOOT’s stock. This is because it is now trading at ~9.1x FY2023 earnings estimates ($5.95) and less than 8x FY2024 annual EPS estimates ($6.56).
The result is that Boot Barn is the definition of growth at a very reasonable price and the case of a proverbial baby being thrown out with the bathwater. So, with the stock pulling back below $55.00 to test technical support with a fair value above $90.00, I see this as a buying opportunity.
DocGo (DCGO) is a $1.1BB company in the Medical Services industry group. It is a leading provider of last-mile mobile health services and integrated medical mobility solutions, and it was founded in 2015.
When it comes to the largest stock market winners over the past half-century, they have two key attributes, and DocGo also boasts these two characteristics. The first is high double-digit sales and earnings growth, and the second is a product or service that changes how we live or disrupts an industry.
In terms of disruption, the company’s mobile health segment up-trains lower-cost medical professionals to provide care in the homes or offices of patients, filling a gap that telehealth cannot.
Meanwhile, its medical transportation segment provides non-emergency ambulance transportation for hospital systems. The result is that healthcare is more efficient, and patients don’t slip through the cracks, given that those who cannot get to hospitals easily can receive the care they need. Those that must get to hospitals for care are provided a way to get through without delay through non-emergency ambulance transportation.
Although the story is exciting from an investment standpoint, the financials are the most important. Fortunately, DocGo excels in this category. The company reported 78% revenue growth in its most recent, and quarterly earnings per share increased 83%, helped by higher margins.
This is a clear differentiator in a market where we’re seeing margin compression for most small-cap companies. In fact, DocGo’s H1 2022 results were so strong that the company raised its FY2022 sales guidance to $430MM and is now looking to take advantage of market weakness to buy back its stock, with it sitting on over $200MM in cash.
Based on a fair earnings multiple of 50 for a high-margin company boasting these growth rates, I see over 72% upside for DCGO, with a fair value of $19.00 (50x FY2023 annual EPS estimates of $0.38).
Longer-term, though, I see an upside to more than $25.00 per share, with the company having a massive TAM where it’s barely scratched the surface and continuing to see strong growth in new contracts.
So, with DCGO being one of the few small-cap names in uptrends with high double-digit revenue growth, I would view any pullbacks below $10.00 as buying opportunities.
With the general market under pressure and stocks continuing to plumb new lows, it’s understandable that many investors are shying away from putting new capital to work.
However, it is a market of stocks, not a stock market. BOOT and DCGO are two examples of growth at a very reasonable price that could increase by 80% over the next 24 months. This is due to being heavily mispriced due to the increased downside volatility we’ve experienced in the market, where investors are selling indiscriminately to raise cash.
So, while position sizing is key in small-cap names, I see both as attractive below $54.00 (BOOT) and $10.00 (DCGO), respectively.
Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing.