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Buy This Undervalued Stock Before Everyone Else Does

There are the wildly popular stocks that everyone talks about, and then there are the off-the-radar ones that don’t engender too much discussion. The latter group isn’t necessarily comprised of newer stocks or bad choices, but for some reason they just don’t pick up talkative fans.

Sometimes you can find amazing deals that the investment community hasn’t picked up on yet. Consider home furnishings group Williams-Sonoma (NYSE: WSM).

Proven model, resilient market

Williams-Sonoma sells high-end housewares under its own name as well as brand names Pottery Barn, West Elm, and some smaller labels. This industry performed well while people stayed home due to the coronavirus pandemic and focused on home improvement. The luxury market is also more resilient to macroeconomic challenges than the general industry, since these shoppers have more spending power. That’s helped Williams-Sonoma continue to demonstrate growth despite inflation and rising costs.

Net revenue increased 10% year over year to $1.9 billion in the first quarter. That was on top of a 50% increase last year in a rebound from pandemic declines. Net income rose 11% in the 2022 first quarter, and margins expanded by 80 basis points to 43.8%.The period saw particularly strong performance from Pottery Barn, whose sales increased 15% over last year. Pottery Barn is also its largest unit with over $3 billion in 2021 sales. 

Part of the company’s exceptional performance has been due to its ease in moving into omnichannel shopping. E-commerce accounted for 66% of 2021 total sales, which were $8.1 billion.  Its goal is to reach $10 billion in annual sales by 2024 while expanding margins. The digital focus gives it an edge as e-commerce becomes more popular.

Williams-Sonoma says it has a total addressable market of $830 billion, and it’s already capturing greater market share. The general home furnishings industry grew 7% in 2021, while Williams-Sonoma’s sales increased 22%.

Management sees a clear roadmap to capturing even more market share. The industry is large and fragmented with around 80% of sales still offline, and about half of sales from local stores. Macro shifts, such as the trend to work from home, help in its favor. Williams-Sonoma has a robust digital ecosystem that supports its physical stores and vice versa, and it’s expanding in international markets.

The company is focused on building a few key areas. It’s targeting what it says is an underserved business-to-business market, developing its cross-brand loyalty program to generate greater sales across its platform. Members spend three to four times more than other customers, so it’s a high priority. It’s also expanding globally through an asset-light franchise model that should add to revenue without weighing down profits through heavy investments in new infrastructure.

Beating the market and super cheap

These are all reasons to expect Williams-Sonoma to continue beating the market. Take a look at how its stock has done over the past five years compared to the S&P 500.

WSM data by YCharts

Now consider that shares are trading at only eight times trailing 12-month earnings, and compare that with Wayfair, RH, and Bed Bath & Beyond.

WSM PE Ratio data by YCharts

Even better, it’s the only company on that list that pays a dividend, and it’s a good one, yielding 2.6% at the current price. Williams-Sonoma stock is down more than 32% this year despite its solid performance, making now a great entry point for new investors.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends RH and Williams-Sonoma. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.

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