In a Few Years, You'll Regret Not Investing in This Underappreciated Share

Utilizing the S&P 500 as a market representative, the index saw a remarkable 26% growth throughout the year (up until Nov. 7). Growth stocks have led the pack, with the S&P 500 Growth Index amplifying its value by 34.5%. On the other hand, the S&P 500 Value Index lagged behind with a growth of 15.8%.

Nonetheless, value stocks present a potential to outshine the market if you're patient and willing to assume additional risk. These stocks are often neglected, which explains their lower valuations. However, with a bit of research, you might unveil firms with strong long-term prospects offering attractive discounts.

Wayfair's (W) stock has experienced a rollercoaster ride. Despite the challenges, investing in it now might prove profitable in the future. Though it isn't an opportunity for everyone, delving into the undervalued aspects of the company might be worth considering.

Struggling Star

Wayfair's stock caught the attention of investors during the pandemic's initial phase when people indulged in online shopping while in lockdown. In 2020, its revenue skyrocketed by 55% to reach $14.1 billion. The company reported profits of $1.86 per diluted share, marking a reverse from the previous year's loss of $10.68 per share.

The stock price soared, surging approximately 150% in 2020. However, it then plummeted by 82%.

Wayfair failed to preserve its initial operational momentum. Consequently, its quarterly revenue decreased by 2% to $2.9 billion. The management attributed this decline to external economic factors that affected consumer spending. Though its losses narrowed to $0.60 per share compared to the previous year's $1.40, it hardly offered any relief.

The company is not alone in experiencing these challenges. Several other enterprises, such as Home Depot and Lowe's, have been affected by these same economic concerns.

However, there are reasons the company's prospects might improve in the near future when conditions improve.

Improving Economic Scenario

Price pressures have lessened, offering consumers some financial leeway. Inflation has been diminishing, registering a 2.4% increase in September. The Federal Reserve remains optimistic, having lowered its key short-term interest rate by 0.5% at its September meeting and another 0.25% at its most recent meeting. The central bank's interest rate cuts are intended to boost spending, which should benefit Wayfair.

Furthermore, Wayfair's performance is closely linked to the housing market. Housing sales have waned due to escalating mortgage rates and limited supply. Existing home sales declined by 1% in September, and despite the Federal Reserve's intervention, long-term mortgage rates have continued to escalate for several weeks. The 30-year fixed mortgage rate hovered around 6.5% in early November.

However, with reduced short-term interest rates, consumers should feel more assured to spend. This should stimulate economic growth and drive housing sales. While it's challenging to accurately predict mortgage rates, they are likely to decrease provided long-term inflation remains under control.

Valuation

Wayfair's stock performance has resulted in a more favorable valuation. The shares trade at less than a 0.5 price-to-sales (P/S) ratio. The shares have a 10-year median P/S of 1.3.

Additionally, the stock currently trades at significantly less than the overall market. The S&P 500 possesses a P/S multiple of 3.

Though the timing of the housing market turnaround is uncertain, it's a cyclical trend. The only question is when, not if, home sales will rebound. When they do, Wayfair, with its user-friendly online services catering to diverse income groups, will remain well-positioned to profit.

Investors considering risky opportunities might find value in Wayfair's stock, given its current undervalued state with a lower price-to-sales ratio than the market average. To bolster its position, Wayfair can benefit from improvements in the economic scenario, as diminishing price pressures, decreasing inflation, and lower interest rates stimulate consumer spending and housing sales.

Successful financing and investments in Wayfair could yield substantial returns, as the company leverages its strong online presence and user-friendly services to capitalize on the eventual rebound in the housing market, presenting an attractive long-term investment opportunity.