3 Large-Cap Stocks to Buy on the Dip Before They Rebound
Today’s episode of Full Court Finance at Zacks explores the stock market’s surge to all-time highs after the Fed cut interest rates and what might happen next. The episode then dives into three beaten-down S&P 500 stocks—Lululemon, Paycom, and Adobe—that investors might want to buy before they rebound. All three beaten-down stocks offer 25% to 70% upside compared to their all-time highs.
Why Lululemon Stock is a Buy Down 45% from Its Highs
Lululemon LULU stock has tumbled 45% in 2024, making it one of the worst performing S&P 500 stocks. Wall Street is worried about slowing growth as Alo and Vuori eat into Lululemon’s share of the higher-end athleisure market LULU created.
Lululemon also faces challenges at the other end of the spectrum from cheaper competitors in the quickly changing fashion and retail industry.
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Lululemon provided slightly downbeat earnings guidance again in late August. Still, LULU is projected to grow its revenue by 9% in 2024 and 8% next year to reach $11.29 billion. This top-line growth marks a massive slowdown from the 30% average revenue growth it did in the trailing three years.
LULU said it is still on track to double sales from 2021’s $6.25 billion to $12.5 billion by 2026. Lululemon is also projected to grow its adjusted earnings by 10% in FY24 and 8% next year, while maintaining margins almost unmatched in nonluxury apparel.
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Lululemon lands a Zacks Rank #3 (Hold) and it has already been punished for its fading earnings and revenue growth. A bottom might finally be near, with Lululemon trying to find support near its pre-covid highs. LULU is back above its 21-day and 50-day moving averages and trading at historically oversold RSI levels.
Lululemon stock trades at a 75% discount to its highs at 18.4X forward earnings and near its decade-long lows at 18.4X forward 12-month earnings.
CEO Calvin McDonald bought $1 million of Lululemon stock in early September. On top of that, Lululemon’s balance sheet is fantastic, helping support its stock buybacks.
Is Paycom Stock a Buy Down 70% from Its Highs?
Paycom Software, Inc. PAYC is a cloud-based human capital management software firm that boasts it is “one HR and payroll solution for managing employees from recruitment to retirement.” Paycom launched in 1998 as one of the first web-based HR and payroll technology companies. Paycom’s offerings resonate with its business clients, and PAYC posted 25% average revenue growth in the past five years.
Still, Paycom stock has been hammered since late 2021 as Wall Street dumped growth-at-all-cost stocks before the Fed started raising interest rates.
The company provided downbeat guidance in 2023 and earlier this year. That said, Paycom might finally be ready to turn the corner, with its FY24 and FY25 earnings estimates trending slightly higher recently.
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Paycom is projected to post over 10% revenue growth in 2024 and 2025 to reach $2.07 billion in sales. The HR software company is expected to expand its adjusted earnings by 1% this year and 12% next year. Paycom has also topped our quarterly earnings estimates for five years running.
To help make up for its slowing growth, Paycom last year rolled out a dividend, which currently yields 0.9%. Paycom stock has soared around 900% during the last 10 years vs. Tech’s 290%. Despite this massive long-term outperformance, PAYC has fallen 20% in the past five years and 70% from its 2021 peaks.
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Paycom recently retook its 21-week moving average and is on the cusp of breaking above its 50-week. Paycom trades 84% below its highs and 65% below its median. PAYC even trades at a discount to the Tech sector at 24.4X forward 12-month earnings.
Why Long-Term Investors Should Buy Adobe Stock
Adobe ADBE stock trades 18% below its 52-week highs and 24% below its all-time highs. The creative software powerhouse is down 2% in 2024, while Tech has climbed over 35%.
Investors are worried about ADBE’s slowing top-line growth and the rise of AI-focused offerings that enable users to generate creative content with almost no skills. Wall Street was also disappointed Adobe had to scrap its planned Figma acquisition and wait longer to deploy its cash and diversify.
The concerns are valid and artificial intelligence could disrupt Adobe’s business. Thankfully, Adobe has rolled out its own impressive AI features throughout its proven industry-leading creative suite, which includes Photoshop, Premiere Pro, and beyond.
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Adobe’s creative software is used by everyone from Hollywood movie studios and best-selling artists to college students and advertising agencies.
Adobe topped our Q3 Fiscal 2024 EPS estimate on September 12. ADBE is projected to post 11% revenue growth in 2024 and 2025 to reach $23.78 billion next year, roughly matching FY23’s 10% sales expansion and FY22’s 12%.
Adobe is also projected to post 14% adjusted earnings growth in FY24 and 13% stronger EPS next year.
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Adobe shares have more than doubled the Zacks Tech sector over the past 10 years. ADBE is up also 90% during the past five years. Yet it still trades 24% below its all-time highs. Adobe found support at its 52-week lows and its long-term 21-month moving average.
Valuation-wise, Adobe trades 52% below its 10-year highs and at an 18% discount to its median at 31.2X forward earnings.
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Adobe Inc. (ADBE) : Free Stock Analysis Report
lululemon athletica inc. (LULU) : Free Stock Analysis Report
Paycom Software, Inc. (PAYC) : Free Stock Analysis Report