The stock market has seen an incredible rally over the past year, leaving many investors wondering if it’s too late to buy in. However, there are still deals to be found if you know where to look. In this article, we will examine two stocks that remain reasonably valued despite the run-up and why should you buy these 2 stocks now: Amazon and Dream Finders Homes.
Amazon is an e-commerce juggernaut that has transformed retail over the past two decades. Despite some recent struggles with profitability, the long-term growth story remains intact. Dream Finders Homes is an upstart homebuilder focused on affordability in a market with a major housing shortage. Both companies have seen their share prices surge in 2023, but valuations suggest there could still be sizable upside ahead.
Here is a closer look at why these two stocks deserve a place in growth-oriented portfolios even at current levels.
Amazon: The E-Commerce Leader Is Getting Its Mojo Back
Amazon’s share price sank in 2022 due to margin compression, but profits and sentiment have rebounded sharply in the past year. The stock is already up 75% year-to-date, begging the question: Is it too late buy?
In a word, no.
To understand why, we need to examine why Amazon struggled last year in the first place. Essentially, the company invested massively into expansion during the pandemic to meet surging demand. This included doubling its distribution footprint in just two years – an astonishing achievement reflective of Amazon’s logistics expertise.
However, all that spending put near-term pressure on profits. As a result, after earning $21.3 billion in net income in 2021, Amazon posted a net loss of $2.7 billion in 2022.
Investors balked at the red ink, sending the stock down 51% from all-time highs. But this set up a buying opportunity as Amazon quickly righted the ship this year.
Through just the first nine months of 2023, Amazon generated $19.8 billion in net income – nearly ten times last year’s loss. The profit rebound reflects two positive trends:
- Amazon’s efficiency improvements are bearing fruit. The infrastructure expansion of 2020-2021 paved the way for higher sales volumes without a proportionate increase in expenses.
- Consumers haven’t meaningfully slowed spending despite inflation and recession fears. Amazon’s top line rose 15% last quarter, suggesting the company will likely meet or exceed its target for 13-17% full-year growth.
With profits recovering rapidly, the market has regained its enthusiasm for this e-commerce titan. However, at 2.8x trailing sales and 21x operating cash flow, Amazon still looks reasonably priced compared to historical averages.
The company’s leading competitive positioning also remains intact. Amazon accounts for nearly 40% of U.S. online retail sales by itself. It’s growing its cloud computing division at breakneck speed while venturing into new frontiers like healthcare.
In short, Amazon appears poised to deliver market-beating returns over the next 5-10 years. While paying 51% less than 2022’s peak price, investors can gain access to one of tech’s most dominant and innovative giants.
Dream Finders Homes: Riding the Affordable Housing Boom
The U.S. housing market is suffering from a major supply/demand imbalance. Home prices have soared nationally due to a construction deficit of 5.5 to 6.7 million units. This shortage won’t get fixed overnight, setting up builders like Dream Finders Homes for an extended growth runway.
Dream Finders focuses specifically on entry-level and move-up buyers. This positions the company perfectly to benefit from Millennial homebuying demand as well as overall housing scarcity.
The company utilizes an asset-light business model centered around obtaining land options rather than outright purchases. This strategy enhances returns on invested capital. It also gives Dream Finders flexibility if its plans for certain land parcels don’t materialize.
Business has been booming in 2023. For the first nine months, Dream Finders closed on 5,161 homes – 17% higher than the comparable 2022 period.
Q3 results saw more of the same, with home closings up 17% year-over-year fueling 14% revenue growth. Gross margins expanded by 200 basis points as well.
This success has prompted the company to raise full-year guidance. Management now expects 2023 home closings to reach 6,750, which would represent 29% growth over the 2022 tally.
Powered by this momentum, Dream Finders shares have nearly tripled this year. But unlike many bubble-era homebuilders, Dream Finder’s valuation doesn’t seem egregious at approximately 10x forward earnings.
Even a moderate earnings multiple suggests significant upside if the company can sustain 20-30% volume improvement for a few more years. With supportive demographics and lending conditions, this seems like a reasonable forecast.
Why These Stocks Should Outperform
In different ways, Amazon and Dream Finders Homes both offer investors growth potential that isn’t fully reflected in current valuations.
Amazon is regaining Wall Street’s love after a brief hiccup in profitability that was always likely to prove temporary. Its competitive strengths and penchant for disruption remains compelling, especially given the still-discounted valuation.
Dream Finders Homes brings a focus on affordable housing and asset-light approach tailor-made to exploit housing scarcity. Impressive home closing growth is driving earnings higher and could persist for years absent a severe economic downturn.
For investors seeking to outperform over the long run in any market environment, buying these two reasonably-priced stocks on sale could pay enormous dividends.