The stock market took a breather in September after surging back rapidly from its March lows. The major indexes saw a swift correction, and prices for many stocks remain near the lows of their recent pullbacks. Long-term investors know a temporary pullback in stock prices can be an opportune time to buy shares.
With that in mind, we asked five of our contributors to each pick a top stock to buy in October. Here’s why they chose Sea Limited (NYSE:SE), Target (NYSE:TGT), Walgreens Boots Alliance (NASDAQ:WBA), Ryman Hospitality Properties (NYSE:RHP), and CarMax (NYSE:KMX).
More than a gaming company
Brian Stoffel (Sea Limited): I’m a sucker for founder-led, wide-moat businesses with strong balance sheets. With Sea Limited, I think investors actually get two wide-moat businesses that are only growing in importance.
For those unfamiliar, Sea operates in Southeast Asia (thus, “S.E.A.”) and has three operations:
- Garena: A gaming unit with an in-house hit — Free Fire — that provides both the majority of sales and the entirety of profits.
- Shopee: This is the number-one e-commerce platform in this region of the world. The value of all the “stuff” sold on the platform (gross merchandise volume, or GMV) more than doubled year over year during the most recent quarter — further cementing the company’s lead.
- Sea Money: By far the smallest component of operations — for now — this represents a mobile wallet those in Southeast Asia can use both on Shopee and Garena … and to purchase everyday items.
While a lot of focus goes toward Garena, I’m much more interested in the latter two. Gaming can be a hard business, with a constant need to update or create new blockbuster hits. But when a company becomes entrenched in e-commerce and payments, wide moats emerge via network effects and high switching costs, respectively.
That’s why I recently added to my position in the company. Some may balk at the company’s sky-high valuation — trading for over 20 times sales. It’s true: The stock has been on a stellar run so far in 2020 and is expensive by most traditional metrics. But I still believe there’s a long way to go for Sea Limited in this heavily populated corner of the globe.
Something for everyone
Jeremy Bowman (Target): One stock I keep coming back to these days is Target. I can’t think of another stock that offers a better combination of growth, safety, and income, especially in today’s market, which is full of uncertainty around the pandemic, bubble-like valuations in much of the tech sector, and a potential political crisis around the corner with the November election.
Target’s recent results speak for themselves. In its second quarter, comparable sales jumped 24.3% and earnings per share nearly doubled. The company benefited from pandemic-driven shopping patterns, but also from the investments it’s made in same-day fulfillment services like Shipt and Drive Up, as sales from same-day fulfillment services jumped 273% and drove six percentage points of comparable sales growth.
Target’s unique position as a retailer that sells essential goods like food, medicine, and cleaning supplies, but is also sought after for “cheap chic” items in areas like apparel and home goods, is a clear advantage during the pandemic. The company experienced double-digit market-share growth in all its major merchandise categories. Additionally, the retailer is likely to see further growth coming out of the pandemic if it can capture market share from flailing competitors like mall-based chains and department stores.
Over the next few months, Target looks positioned to deliver strong results. The company is focused on winning business around key shopping occasions like back-to-school, Halloween, and the holiday season, where Target’s omnichannel infrastructure should provide a distinct advantage.
Beyond its growth opportunities in e-commerce, capturing market share, and new small-format stores, the company is also a Dividend Aristocrat, offering a yield of around 1.7%, and trades at a lower P/E valuation than the S&P 500. If you’re looking for a stock that has something for everyone, it’s hard to beat Target.
A deep-discount cure for your investing ills
Sean Williams (Walgreens Boots Alliance): Though growth has been king for more than a decade, pharmacy chain Walgreens Boots Alliance is a value stock offering historically low valuation multiples and an intriguing turnaround story.
As you may know, pharmacy chains are facing increased competition from online giant Amazon and even telemedicine providers. They must adapt to thrive, and that’s exactly what Walgreens is doing on a step-by-step basis. The company has put in motion a multipoint plan that’ll provide nearly $2 billion in annual savings by 2022, improve front-end sales, and increase repeat pharmacy customers (from whom it generates the lion’s share of its margin).
One of the most exciting aspects of this transformation is Walgreen’s partnership with VillageMD. The two companies are working together to create an integrated primary care and pharmacy model co-located at Walgreens locations that’ll be perfect to treat patients with chronic illnesses. Up to 700 of these full-service doctor offices should be up and running within five years.
Walgreens is also relying on digitization to drive growth. Big investments in the company’s omnichannel presence, along with digital ordering and a broader selection for drive-thru pickup options, should allow for a healthy uptick in organic growth.
There’s also a broader theme at work here that folks might be overlooking: an aging America. As baby boomers grow older, there’s a growing likelihood that they’ll need maintenance therapies to improve or maintain their quality of life. This should provide a healthy base for Walgreens’ pharmacy segment.
Right now, investors can pick up shares of Walgreens Boots Alliance’s for around 5.4 times operating cash flow, and roughly 7.7 times Wall Street’s consensus earnings per share for 2021. As an added bonus, it’s yielding a market-trouncing 5.2% while riding a 44-year streak of having increased its base payout.
Incredible business; temporary problems
Jason Hall (Ryman Hospitality Properties): Ryman Hospitality, which owns some of the most valuable resort, convention, and entertainment venues outside of Las Vegas, was forced to close all of its properties for part of the second quarter. Occupancy rates are still below 20%, with weekend occupancy of 32%, and Ryman is burning more cash than it’s bringing in. There are also concerns about Ryman’s future relevance: How much will business travel be changed post-COVID?
Between the “now” problems and future worries, Ryman shares are still down nearly 60% from the pre-crash high. Understandable if you believe its best days are over.
I don’t. I think this is an opportunity to buy a wonderful business while others overestimate the risks and problems, and underestimate the prospects on the other side of the pandemic.
The coronavirus pandemic may permanently change business travel, with Zoom and other communications tools potentially reducing the need for as much in-person meeting. If that proves true, the convention industry should benefit; more remote workers and reduced in-person business travel will almost certainly lead to more large group gatherings, where Ryman is a leader.
There’s evidence this is already happening. Ryman has rebooked almost 800,000 room nights lost to the pandemic, and is closing in on 2 million net booked room nights for 2021 at higher rates than prior years.
What’s in it for investors? How about a stock that could nearly triple post-COVID, and pay investors almost $1 per share in quarterly dividends? Ryman was a $90 stock prior to the pandemic, paying $3.60 per share in annual dividends. Both those figures have fallen for now, but the company’s business could get even bigger in the future.
You won’t get a lemon with CarMax
Adam Levy (CarMax): Demand for used cars surged in April and May as car factories were forced to shut down production amid the coronavirus pandemic. Even as manufacturing ramped back up, CarMax saw relatively strong demand, particularly for older cars, indicating that consumers are looking to spend less on vehicles amid the uncertain economic environment we currently face.
CarMax reported second quarter earnings that topped analysts’ expectations by a wide margin. Still, the market sent shares down 13% after the report. It’s hard to understand why the market sold off the shares, especially given the potential for used car sales to remain elevated relative to new car sales.
After furloughing some employees and halting new store openings, CarMax is now back in growth mode. It’s actively hiring again and plans to open 8 to 10 new stores in fiscal 2022. It’s also replenishing inventory at a rapid rate, increasing its depleted inventory from the end of the first quarter by 50% in the second quarter. It’ll continue to grow inventory now that it’s completed the nationwide rollout of its online platform. Management expects the differentiated omnichannel experience to drive increased demand for CarMax.
CarMax’s massive and unique data set allows it to buy and sell cars with confidence in achieving its target gross margin. Additionally, its financing arm provides a significant advantage in enabling it to keep prices low for customers despite the increasing value of used cars in today’s market. Management says it would rather capture market share than gross profit margins, and that’s a good long-term strategy. The used-car market is extremely fragmented, so if CarMax can consolidate the market, it stands to see much greater benefits to its bottom line long term.
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