It's easy to get excited about stocks that are soaring at the moment -- and so you may be tempted to scoop them up and benefit from the momentum. In many cases, that's a great idea. But it's also a good idea to take a look at stocks trading at dirt cheap valuations. If you plan on holding on for at least five years, this sort of player could represent a huge growth opportunity for your portfolio.
Though the S&P 500 index has climbed in the double digits since the start of the year, many quality companies have been left on the sidelines. They've either declined or underperformed the index. But thanks to a solid financial situation and excellent future prospects, they have what it takes to deliver over the long run.
In fact, two e-commerce stocks fall into this category, trading at absurdly cheap valuations, and you can buy a few shares of both with just $500. Let's check out these top stocks that long-term investors should buy right now.
![https://img.particlenews.com/image.php?url=13kRYK_0uU0ofrV00](https://img.particlenews.com/image.php?type=thumbnail_580x000&url=13kRYK_0uU0ofrV00)
Image source: Getty Images.
1. Chewy
If you're a pet parent, you may know Chewy (NYSE: CHWY) well. The e-commerce company sells everything you need to keep your pet happy and healthy, from food, treats, and toys to prescription medicines and health insurance. The company has steadily grown revenue since its 2019 initial public offering, and it even became profitable in 2022.
What I like about Chewy is that most of its sales come from loyal customers who keep coming back, offering us some visibility on what to expect in the quarters to come. We can see this through Autoship, a service that automatically reorders and ships customers' favorite items right to their doorsteps. Each quarter, Autoship makes up more than 75% of Chewy's total sales.
This doesn't mean Chewy is sitting back and relying on its regular customers, though. Instead, the company is focused on growth, and we can see this through two recent expansions. Chewy has expanded its e-commerce business into Canada, a market it sees as one with profitability potential that's similar to that of the U.S. Chewy was also able to launch this expansion without great expense, thanks to its already existing software infrastructure.
Chewy's second big move is its development of veterinary practices, an opportunity to diversify its revenue stream and offer its online business greater exposure. On top of this, Chewy remains debt-free and holds more than $1.1 billion in cash -- and the company even recently announced its first share repurchase program. All this shows Chewy has what it takes to continue funding growth, and management is confident about the future.
Chewy shares, after gaining more than 12% this year, still underperformed the S&P 500. At 28x forward earnings estimates , they look ridiculously cheap considering the company's growth so far and its long-term potential.
2. Etsy
Etsy (NASDAQ: ETSY) has had more of a difficult time than Chewy in recent years. The company's growth took off during early pandemic days when people favored online shopping, but it's since struggled to pick up momentum. There are reasons to believe that Etsy could win over the long term, though, and offer your portfolio a significant boost.
The first positive point has to do with Etsy's business model. The company connects the makers of handmade items to shoppers interested in buying those sorts of items. Etsy provides the e-commerce platform, but isn't involved in storing or transporting any of these goods -- that's the seller's responsibility. This makes Etsy a capital-light business, and as a result, the company is able to transform about 90% of its adjusted EBITDA into free cash flow.
In the first quarter, Etsy had a cash balance of about $1.1 billion and reported $59 million in consolidated free cash flow.
Another bright spot is the fact that Etsy has been able to grow its active buyers and repeat buyers -- up 1.9% and 2.9%, respectively, in the quarter. This shows that shoppers like what they're finding on Etsy and keep coming back, a positive sign for the future.
What's weighed on Etsy has been a decrease in discretionary spending as part of a generally unfavorable economic environment. This has resulted in declines in gross merchandise sales, or the total dollar amount of goods sold on the platform.
I see this as a temporary challenge. Etsy's unique product offerings, ability to keep customers coming back, and capital-light structure could help it stand out and win over the long term. And that's why right now, trading at 13x forward earnings estimates, it looks absurdly cheap.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy and Etsy. The Motley Fool has a disclosure policy .
Comments / 0