2 Top Value Stocks to Buy Right Now – The Motley Fool

Buying shares of companies below their intrinsic value is what successful investing is all about. These opportunities become more plentiful during market downturns, making the current environment ideal for value investors.

Many top stocks are selling for low prices relative to their profits, or price-to-earnings (P/E) ratio. Value investing won’t always lead to home-run investments, but it can stack the odds in your favor.

Let’s review why two industry leaders in recreational vehicles and toys could lead to big returns in the next bull market.

Winnebago offers growth at a bargain price

Wall Street has a tendency to overvalue stocks of companies doing exciting things in technology, for example, and overlook hidden gems in boring industries, such as recreational vehicles. That’s the only explanation why Winnebago Industries (WGO 2.26%) is selling as cheap as it is right now, despite the underlying business posting solid results in a difficult economic environment.

In the most recent quarter, Winnebago grew adjusted revenue by a whopping 41% over the year-ago quarter. Revenue exploded during the pandemic, as more people started to seek outdoor activities, and it’s not slowing down. The recreational vehicle industry is expected to grow from $56 billion in 2020 to $88 billion by 2028, according to Fortune Business Insights.

Despite that incredible growth, investors can buy the stock for a mere 6.4 times expected earnings for the current year. That is a true bargain, given the average company historically trades for a P/E of about 15.

What is the market missing? Sometimes the market will price a stock at a low P/E if it’s expecting profits to fall in an industry downturn. Clearly, Winnebago won’t keep selling RVs at the current pace forever. The market is anticipating a deceleration in growth, but it’s missing two important qualities of the business:

Winnebago is a stronger, more diversified business than in the past, when it primarily relied on motorized homes for sales. It now operates across three segments: towables, motor homes, and marine.
More importantly, 85% of Winnebago’s cost structure is variable, meaning that the company can hold profit margin up even if demand falls during a recession.

Winnebago earned $392 million in profit on $4.8 billion in revenue over the last four quarters. Over the last six years, profits grew faster than the top line as the company invested in new product lines. That is evidence management is not chasing growth, but profitable growth.

Given the long-term growth expected in the RV industry and Winnebago’s leading brand, I would scoop up shares in a heartbeat before Wall Street wakes up.

Mattel’s profitable growth is underappreciated

Toys are a resilient product in challenging times. Parents will generally continue spending on their children, even if that means cutting back in other areas. This was certainly demonstrated in the first two quarters of the year, with toy sales up 2% year over year. While that was completely driven by price increases, it was one of only six industries NPD Group tracks that posted growth.

Mattel (MAT -2.07%) did even better. The maker of iconic brands like Barbie and Hot Wheels posted a revenue increase of 20% in the second quarter. Like Winnebago, Mattel stock trades at a low P/E, and it’s a well-managed business with growth catalysts.

Mattel has completed a successful turnaround under CEO Ynon Kreiz, who took over in 2018. The business is growing faster, adapting its top toy franchises to feature films, and growing profits. In 2023, Mattel should benefit from the global rollout of Monster High Barbie, the return of Disney Princess and Frozen toys, and the theatrical release of a new live-action Barbie movie.

2023 is shaping up to be a huge year for the company. Management’s 2023 guidance calls for high-single digit sales growth, with adjusted earnings per share of $1.90 or higher. That puts the stock at a P/E of 10 times next year’s earnings estimate.

By the end of 2023, Mattel could be trading at least 50% higher than it is right now. That would imply a P/E of 15 on next year’s earnings, which Mattel has certainly deserved, given its better growth prospects.

If Mattel can license toy properties to other markets, such as gaming, and continue to innovate within the doll category, where it’s the leader, investors may have a great investment to hold for the long term.