The S&P 500 index has gained 20% YTD, but the journey has been anything but smooth. While technology stocks led the rebound, many sectors struggled to keep pace. As we head into 2024, let’s explore three stocks with the potential for a contrarian turnaround.
We have compiled a list of the bottom twenty performers in the S&P 500 index, which have recorded a YTD performance ranging from -28% to -72%. This comes in a year when the S&P 500 index itself is up 20% YTD.
Of these twenty, we’ve identified 3 of these stocks as potential turnaround contrarian plays and will share some information about them and why they are suitable turnaround plays.
1) Estee Lauder (NYSE: EL) (YTD: -43%)
Estée Lauder is the second-largest cosmetics company in the world after L’Oreal. It owns brands such as La Mer, Jo Malone, Clinique, Aveda, Bobbi Brown, and its namesake brand Estee.
Estee delivered a financial performance outlook that was much worse than anticipated, citing weak results from its Asian segment due to a further slowdown in growth in China and Asia broadly. This segment accounts for about 30% of global sales and is the primary reason for the decline.
Estee’s net sales for FY ending June 23 decreased by 10%, and constant currency organic net sales decreased by 6%. Earnings per share also decreased by 57% to $2.79.
At the time when Estee released its FY23 financials, it expected to return to organic net sales growth and deliver progressive margin recovery in FY24.
However, its plan to rebuild profitability has been pushed back to FY25 and onwards, as 1QFY24 net sales decreased 10%, and EPS declined further to $0.09 compared to $1.35 in 1QFY23.
Estee expects to face incremental external headwinds arising from pressures in the Asia travel retail sector and a slower recovery of overall prestige beauty in mainland China.
Estee is doing well in some geographic regions as momentum continued in many developed and emerging markets worldwide, where organic sales grew strongly and Estee realised gains in prestige beauty share. Encouragingly, Estee has also returned to growth in the U.S., with Fragrance, Makeup and Skin Care all contributing.
In its latest outlook, Estee still anticipates to progressively improve performance in the second half of fiscal 2024. Estee also plans to continue to strategically invest in consumer-facing activities, where appropriate, in areas to support recovery, share gains and long-term profitable growth. These investments include innovation, advertising, growth of its emerging markets and the completion of its first manufacturing facility in Asia, located in Japan. This facility will support the development of the regionalization of the supply chain in the Asia/Pacific region.
As a result of these efforts, Estee forecasts a return to net sales growth in the second half of FY 2024.
Estee is also working towards gross margin expansion for FY24, primarily driven by strategic price increases, discount reductions and lower obsolescence charges, largely offset by manufacturing under-absorption. The contraction in the first half of FY2024 is expected to be more than offset by expansion in the second half.
Progressive operating margin improvement is expected throughout the second half of FY 2024, driven by the cadence of improvement in the Asia travel retail business and in mainland China.
Estee is likely at the bottom both in terms of share price, having fallen to a 5-year low, as well as from a fundamental perspective after de-risking its share price by lowering its outlooks multiple times in the last 12 months.
2) Etsy Inc (NASDAQ: ETSY) (YTD: -26%)
Etsy is a unique e-commerce player focusing on a niche segment of the broader e-commerce market. It serves as the global marketplace for unique and creative goods such as handcrafted pieces and vintage items that are at least 20 years old. The site operates in the tradition of open craft fairs, giving sellers personal storefronts where they list their goods for a fee.
Similarly to other e-commerce marketplaces, Etsy has felt the impact of inflation on consumers who focus on essentials, reducing spend in discretionary categories. With many of Etsy’s categories classified as discretionary, Etsy has faced heavy pressures in a highly competitive environment.
As a result of the environment, Etsy has just announced that it is laying off 11% of its workforce at the height of the holiday season.
To better compete with other ecommerce sites, Etsy is revamping its user interface, making it more organised and curated to attract buyers, while also assisting to help sellers compete via Etsy funded campaigns, discounted coupons and data analytics. Etsy also continuously invests to improve the logistics aspects of the transaction.
Etsy reported a 1.4% decline YoY in its 9M23 gross merchandise sales (GMS) and a 1.2% increase YoY to its 3Q23 GMS. Revenue increased by 8.4% and 7.0% respectively largely due to a 16-17% increase in service revenue. Take rate was about 20.9%.
Etsy ended the third quarter with $1.1 billion in cash and $2.3b in debt and a equity deficit of $0.6 billion.
Etsy also swung into a profit and improved its net income margin substantially to 11.8% and 13.8% respectively. Adjusted EBITDA was at 27.2% and 28.6% respectively.
A few months back, Etsy sold Elo7, the Brazilian Etsy which it acquired in July 2021 for $217 million, to fellow Brazilian online market place Enjoei for an undisclosed amount, following a $147 million write down.
Etsy provided an outlook for 4Q23 with its GMS currently estimated to decline in the low-single-digit percentage YoY. However, if trends worsen, that could become a mid-single-digit percentage decline, and if trends improve GMS could be flat or even up slightly YoY.
Etsy estimate 4Q23 take rate to be approximately 20.8%, down slightly. Adjusted EBITDA margin for 4Q23 is currently estimated to be between 26-27%, also lower than previous quarters.
Etsy also wrote down the value of its acquisition of Depop by $898 million, a secondhand clothing marketplace which it purchased for $1.625 billion in July 2021. Etsy also owns Reverb, a site for buying and selling musical instruments.
The core Etsy business is doing well when compared to other consumer goods / e-commerce business, investors remained concerned about Etsy’s scalability and that its acquisitions of niche e-commerce sites are not doing well. Nonetheless, Etsy has demonstrated its ability to grow revenue, turn a profit and at the same time gain market share.
3) VF Corp (YTD: -30%)
VFC is a global apparel and footwear company with 13 brands in three categories, namely the outdoor, active and work categories. Its largest brands include Vans, Supreme, The North Face and Timberland.
It dominates the majority of the US backpack market with brands like JanSport, Eastpak, Timberland and The North Face.
The company’s stock has substantially underperformed both the S&P 500 Index and the S&P 1500 Apparel goods sub index in recent years.
VFC underperformed in FY23 as adjusted earnings fell from $3.18/share in FY22 to $2.10/share in FY23 as revenue declined by 2% to $11.6 billion. VFC initially communicated a positive financial outlook, expecting improvements to revenue and margins. However, the company withdrew this in its 2QFY24 earnings release.
In its 2QFY24 earnings, VFC saw a slight decrease in revenue, gross and operating margins as many brands such as Vans, Timberland and Dickies recorded substantial revenue decrease.
Both wholesale and direct to consumer segments were down 1% and 3% respectively. The wholesale segment was affected by underperformance in America, while the direct to consumer segment was affected by the Vans brand.
On the bright side, VFC’s international business was up 10% as Greater China and EMEA revenues were up 8% and 14% respectively, reflecting growth across all channels.
VFC’s inventory levels as at Sept 2023 also remained somewhat elevated, higher than Mar 2023’s level but coming down from a year ago.
As a result, VFC reduced quarterly dividends substantially to $0.09 per share from $0.50 in 2022 and $0.30 in 2023.
Overall, VFC expects for a more difficult US wholesale environment as Vans’ performance is not anticipated to improve in FY24.
VFC also announced a comprehensive transformation plan which will likely result in charges including cash and non-cash items as it plans to significantly reduce fixed costs and debt leverage.
VFC’s share price has fallen tremendously over the past 2 years, valuing a company with more than $11 billion revenue at a market capitalisation of $7 billion. Should the company be able to alleviate investor concerns by reducing debt, generating cash and returning to growth, it should be one stock that would quickly regain investor’s confidence and rebounds.
Closing statements
These three stocks are among the worst performing stocks in the S&P 500 Index. However we think these three stocks could be contrarian buys. Estee and VFC are both consumer discretionary plays that has seen weak sales and high costs hit its top and bottom line. Both are trying to move back onto a positive trend by identifying and fixing its problems. Estee is underperforming in Asia, while VFC is underperforming in the Americas. In addition, VFC also has a heavy debt burden which it is trying to shake off by reducing working capital, dividends and increasing profits.
Etsy is an e-commerce play and also a consumer discretionary play. It was able to cut cost and quickly turn a profit amidst slower gross merchandise sales. At the same time it is trying to shake off its poor acquisition track record and prove to investors the long term viability of its business by winning market share and improving its operational support on its platform.