Before becoming CEO of Charlotte-based Lowe’s (NASDAQ:LOW) in July 2018, Marvin Ellison failed to get JC Penney out of its bankruptcy spiral. Still, there was hope he could do for LOW stock what he couldn’t do for the troubled retail giant.
Before that, Ellison was a former Home Depot (NYSE:HD) executive, and since returning to his natural habitat he has created a shining success. The stock is up 83% on his watch, against a 46% rise for its Atlanta-based rival.
The pandemic has helped. Lowe’s sales set a record during the July quarter, during the worst of the lockdowns. The momentum has continued.
Lowe’s stock is still cheaper than Home Depot.
The South Is Key for LOW Stock
Key to Lowe’s rise is the deep south, according to a recent white paper from Placer.AI.
Foot traffic is up nearly 20% in Louisiana, Mississippi, Alabama, and Arkansas, where Lowe’s is stronger. Its market share in Mississippi is nearly twice that of Home Depot.
Lowe’s has also learned how to cater to its best customers with a loyalty program called Lowe’s for Pros, launched in July. About 63% of its store visits are now from regulars, a figure matched only by Home Depot and Menards, a privately-owned chain in the Upper Midwest.
Lowe’s foot traffic has been consistently higher than Home Depot’s since June, although the gap has narrowed in the most recent quarter.
Gallery: 9 Stocks That Investors Think Are the Next Amazon (InvestorPlace)
With a share price that has risen by over five times in the past five years, Amazon (NASDAQ:AMZN) is undeniably the best e-commerce player in the technology sector. So, seeking the next Amazon-like stocks to buy is definitely worth the effort. That’s because AMZN is a powerhouse. It took on conquests of brick-and-mortar sectors and shook them out. For example, when the company bought the grocery chain Whole Foods, it widened its addressable market as well as implemented innovative, tech solutions to get rid of checkout lines. For decades after the dot-com bust, though, skeptical investors looked solely at valuation and dismissed Amazon. But their argument proved wrong. Now, the market has rewarded AMZN by assigning a value to its moat. That said, for investors who feel Amazon is fully valued and has less upside than it had in the past, what promising companies are next? In my view, there are nine names that could become the next AMZN stock on the market. Of course, the e-commerce giant is still a pick to buy and hold. However, these companies are still certainly worth exploring: Jumia (NYSE:JMIA) Corelogic (NYSE:CLGX) Apple (NASDAQ:AAPL) Alibaba (NYSE:BABA) Pinduoduo (NASDAQ:PDD) JD.com (NASDAQ:JD) Mercadolibre (NASDAQ:MELI) Booking Holdings (NASDAQ:BKNG) Etsy (NASDAQ:ETSY)
Stocks to Buy: Jumia (JMIA)
First up on this list of stocks to buy is Jumia, a company that’s already rewarded investors with a fivefold return in 2020. As such, many think that this e-commerce platform will dominate the African market and become the next Amazon. Jumia explained its moat in one presentation for a Credit Suisse Technology Conference — the company has a marketplace, logistics and JumiaPay all under one brand. So, it’s single sign-on and full integration offers users the convenience of shopping in one place. Moreover, Jumia’s platform is scalable, specifically built for the African customer base. Its integrated ecosystem should lead to higher gross margins next. JMIAIndustryS&P 500 Quality Score 475279 Gross Margin 61% 28.6% 28.8% Operating Margin -109.8% 5.8% 12.3% Net Margin -120.5% 6.4% 7.4% Return on Assets -90.6% 6.8% 5.6% Chart courtesy of Stock Rover Currently, JMIA stock scores a 47 on quality, below both its industry and the S&P 500 average. However, if it scales its platform, the company’s margins will surely rise.
Corelogic (CLGX)
Corelogic provides data and analytics for the real estate sector. In that sense, it could become the next Amazon of the property and mortgage database market. Looking at some of its metrics, CLGX stock has a quality score far and above its industry. And you can expect this gap to widen even further. Why? The company recently raised its full-year 2020 and 2021 guidance. Corelogic forecast earnings per share (EPS) as high as $4.25. The firm also cited its “strength in property tax processing, insurance & spatial and international as well as continued strong housing market fundamentals.” Certainly, those will help lift earnings. CLGXIndustryS&P 500 Quality Score 895879 Gross Margin 51.9% 31.1% 28.8% Operating Margin 16.1% 8.8% 12.3% Net Margin 11.6% 5.2% 7.4% Chart courtesy of Stock Rover There’s also a near-term catalyst for Corelogic: calls to entertain a buyout from investment firms Cannae Holdings (NYSE:CNNE) and Senator Investment Group. After turning down a $7 billion offer, the pressure to consider a deal could lead to a takeover at a higher stock price. Given the solid housing market going into 2021 among other pluses, Corelogic’s platform is set to dominate the industry, making it one of the better stocks to buy right now.
Apple (AAPL)
Next on my list of stocks to buy is Apple. At its current market capitalization of over $2 trillion, AAPL is already bigger than Amazon. Yet, it could move higher. At a forward price-to-earnings ratio of the 32.47, the stock does not reflect its strength in the services and subscription business. Moreover, Apple likely topped smartphone sales during this holiday season. The company’s iPhone Mini, for instance, appeals to consumers who are unwilling or unable to pay up for an iPhone 12 Pro. And Pro sales should still help lift margins, too. These increased unit sales will also lead to higher subscriptions for Apple One, the company’s bundled service that includes iCloud, Apple Music, Apple TV+, Apple Arcade, Apple News+ and the all-new Apple Fitness+ (on the Apple Watch). At a low discount rate, AAPL stock is worth around $150 on a 5-year discounted cash flow (DCF) growth exit model.
Alibaba (BABA)
After trading at a 52-week high of $319.32 in October 2020, BABA stock fell when the company’s related Ant Group initial public offering (IPO) was halted by the Chinese government. The crackdown forced Ant to refocus on its payments business and actually created a discount in BABA stock. However, though accused of monopolistic practices, Alibaba is still the e-commerce giant of China. For instance, on its November 24-hour event called Singles Day, the company smashed records, posting gross merchandise volume sales topping $74.1 billion. This is nearly a 100% increase from the $38 billion it posted in 2019. For comparison, Amazon’s 2020 Prime Day posted $10.4 billion in sales. Currently, 21 Wall Street analysts have an average price target of $333.44 for the stock and recommend BABA as one of the better stocks to buy.
Pinduoduo (PDD)
Pinduoduo may not be as well-known as Alibaba. However, that does not mean it can’t be the next AMZN. This pick of the Amazon-like stocks to buy has a mobile platform that features a social shopping experience. All of the company’s revenue are derived from China. Although a margin of safety calculation suggests PDD stock is worth closer to $108, investors cannot ignore the over threefold return in 2020. Mainly, investors are betting this leading Chinese e-commerce player will dominate the mobile commerce space. On Nov. 18, 2020, the company raised $6.1 billion through a convertible note and equity offering. Strong demand allowed the company to plan for an over-allotment. What’s more, the drop in risk of major China-based firms getting delisted is a positive catalyst for PDD stock. Plus, as the Democrats take control of the U.S. government in the next week, the chance to improve U.S.-China trade relations will help Pinduoduo. Instead of selling stocks based in China, investors will flock back to them. Currently, 10 Wall Street analysts followed by TipRanks have a $169.20 average price target on PDD stock.
JD.com (JD)
JD.com is yet another dominant China-based e-commerce company on this list of stocks to buy. Not only does the its logistics back-end strengthen its moat, but its potential spinoff of JD Cloud and the artificial intelligence (AI) business is also reminiscent of Amazon’s diversified strength. Recently, JD announced that it would “explore the feasibility and terms” of spinning those two units into JD Digits, a holding company. So, instead of holding AMZN stock for Amazon Web Services, investors could get into the cloud and AI business by investing in JD.com. What’s more, just like with Pinduoduo, the easing concerns over delisting is a positive for JD stock. That will further lift its share price. Plus, investors should be able to appreciate the company’s strong prospects based on its customer growth. And the Chinese e-commerce business shows no sign of slowing. Finally, JD’s forward price-earnings in the 55 times range makes it much more attractive than Amazon. MetricsRangeConclusion Discount Rate 10.5% – 9.0% 10.00% Terminal Revenue Multiple 0.6x – 1.6x 1.1x Fair Value $77.42 – $172.30 $122.65 Model courtesy of finbox Applying the metrics above to a 5-Year DCF: Revenue Exit model suggests that JD stock is actually worth around $123.00. Right now, it’s priced at a little over $89.
Mercadolibre (MELI)
Founded in 1999, Mercadolibre’s commerce business accounted for a significant portion of its net revenue in Q3 2020. What’s more, its online marketplace has notable reach, operating in many Latin American countries. As such, MELI stock has excellent growth, as the table shows below. It more than doubled in 2020 and is one of the top 20 performers on the Nasdaq Exchange this year. In Q3, the company posted revenue of $1.15 billion, up almost 149% year-over-year (YOY). Additionally, its gross merchandise volume topped $5.9 billion and its total payment volume of $14.5 billion exceeded the consensus estimate. MELIIndustryS&P 500 Growth Score 946077Sales Growth Sales Growth Next Year 40.4% 19.8% 10.3% Sales 1‑Year Chg (%) 44.6% 15.4% 12.9% Sales 3‑Year Avg (%) 33.3% 24.1% 11.1% Chart courtesy of Stock Rover On Jan. 8, the company priced a $1.1 billion notes offering. At interest rates in the 2% to 3% range, Mercadolibre will be able to lower its debt management costs. It will also have more capital to invest in projects. This will lead to long-term growth acceleration, making this name one of the better “next-Amazon” stocks to buy.
Booking Holdings (BKNG)
Booking Holdings is the world’s largest online travel agency. Of course, the cancellation of cruises and travel did hurt hotel room and vacation bookings over the pandemic. That held back BKNG stock’s one-year return to only about 6%. However, the mass vaccination rollout worldwide could put an end to the current shutdown. This would restore and accelerate travel booking volumes. So, as the Amazon of tourism bookings, BKNG stock is set to outperform this year. In fact, Airbnb’s (NASDAQ:ABNB) doubling at its initial public offering (IPO) is a strong indicator for the investor appetite in this industry. Still, ABNB should not trade at a similar market capitalization to Booking. For one, BKNG produces strong free cash flow, compared to competitors like Expedia (NASDAQ:EXPE). So, essentially pent-up demand in hospitality will lead to a sharp increase in travel in the coming year. And, assuming that Covid-19 vaccinations make traveling safe again by the second half of this year, the travel boom should extend further into 2022. Booking will be among the first companies to really benefit from that return.
Etsy (ETSY)
Last on my list of stocks to buy is ETSY stock. Etsy is a retailer of handmade and crafted goods. It also sells vintage items. By attracting unique sellers to its platform, the company has a strong retail moat that Amazon cannot compete on. As shown below, ETSY stock scores near-perfect on growth, thanks to its long-term historical sales. ETSY StockIndustryS&P 500 Growth Score 936077Sales Growth Sales Growth Next Year 11.7% 19.8% 10.3% Sales 1‑Year Chg (%) 68.4% 15.4% 12.9% Sales 3‑Year Avg (%) 46.1% 24.1% 11.1% Sales 5‑Year Avg (%) 38.1% 28.1% 8.2% EPS Growth Next Yr. Growth Est. 3.3% 29.6% 21.9% Chart courtesy of Stock Rover In Q3, Etsy posted EPS of 70 cents. Additionally, revenue rose by 128.1% YOY to $451.5 million. And, after gross merchandise sales grew by 119.4%, investors can count on the retailer repeating that pace in the next quarter. Today, ETSY even traded at a new 52-week high of $221.12. While the market is speculating on a quarterly earnings beat, the chances of exceeding estimates are high. This online retail business is booming and the continued pandemic lockdown of 2021 will only fuel its sales. With a unique product offering and a strong network of sellers, Etsy’s profit margins are sure to expand as operating costs fall and customer growth accelerates. On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
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10/10 SLIDES
Lowe’s Isn’t Really Overvalued
Lowe’s is richly valued when compared with the market but still undervalued compared with Home Depot, according to Trefis.
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Entering trade on today, Lowe’s was selling around $174/share. That’s a market cap of more than $127.5 billion on estimated fiscal 2021 sales of $72 billion. The company reports the Christmas quarter on Feb. 17, with analysts expecting a profit of $1.19/share on revenue of $19.15 billion.
For a retailer, this is a rich valuation. It’s 1.76 times revenue, and 24 times sales. But Home Depot sells for nearly 2.5 times its sales, and about the same price to earnings. Lowe’s bigger gains mean its dividend of 60 cents yields just 1.4%, while Home Depot’s $1.50 payout yields 2.1%.
Morgan Stanley (NYSE:MS) analyst Simeon Gutman said in December that Lowe’s stock could rise another 40%. Since he made that call, LOW stock is up 16%, while Home Depot is up 7.6%.
Market Share and Lowe’s Stock
Lowe’s is continuing to gain market share. In its most recent quarterly report, covering the period through October, the company more than doubled its online sales. It also improved 15% in merchandising departments, 20% across geographic regions. The company has managed to improve margins even while raising salaries.
The stock’s outperformance has continued into 2021, according to Zack’s. Lowe’s stock is so hot it has doubled the performance of Amazon.com (NASDAQ:AMZN) over the last six months.
Yet Lowe’s bulls continue to pound the table for the stock. One, who bought into the stock last March, says its installation services will continue to drive results, and that it could easily afford a dividend increase. He’s hanging on despite his huge paper gains.
The Bottom Line
I have both a Lowe’s and a Home Depot near me and usually go to Lowe’s first. I’ve used their delivery and installation services and, the first time I ordered a sink online from Home Depot, it broke. (They replaced it, and I took delivery of the new one at the store.)
Both these companies are richly valued right now. Some of the gains from the pandemic are almost certain to be temporary. I think Home Depot still has an edge among professional contractors.
Ellison has done a superb job of improving Lowe’s merchandising, especially online, bringing the chain neck-and-neck with its larger rival. A conservative investor can buy either stock with confidence.
At the time of publication, Dana Blankenhorn owned shares in AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at [email protected], tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
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