With a possible recession looming, the market has spent 2022 busily separating what it thinks is the wheat from the chaff. And it seems there was an awful lot of chaff around, because a good few FTSE 100 stocks have sold off aggressively.
Here are three beaten-down stocks that I reckon the market is underestimating long term.
The UK’s leading online auto platform
Auto Trader (LSE: AUTO) is the UK’s largest online car sales platform. It’s a digital marketplace where individuals and car dealerships can advertise and sell vehicles. Crucially, the company doesn’t hold car stock itself, which makes the company very profitable.
The share price of Auto Trader is down 28% so far this year. The market naturally seems worried about the impact a recession could have on the demand for used cars.
Yet for now, demand remains robust. Full-year revenue rose to £432.7m this year, which is 17% higher than pre-pandemic levels. Operating profit rose 88% year on year to £303.6m. These are healthy numbers.
I like the company’s low cost base, which means most of the revenue from new users advertising on the platform becomes profit. It also has a few attractive avenues of growth left to pursue, such as car finance options on the site and vehicle leasing.
Data giant
Experian (LSE: EXPN) shares are down 25% this year. Again, the market seems concerned about the impact a recession and higher interest rates could have on demand for the company’s credit checks. Fewer people taking out loans won’t be great for Experian, which makes most of its money selling credit reports to banks and credit card companies.
However, on the flip side, a recession and rising bills could be exactly the time when people will be seeking credit. Either way, Experian has a dominant position in its industry, with credit information on 1.4bn people and 191m businesses worldwide. Over the long term, I see worldwide demand for credit (and Experian’s services) growing strongly.
One risk I see with Experian, though, is its valuation. With a current price-to-earnings (P/E) ratio of 24, that is much higher than the FTSE 100 average.
Still number one
Rightmove (LSE: RMV) runs the UK’s largest online property website. It’s extremely profitable, with an operating margin of 73%. Customers now spend an average of 1.5bn minutes on its site per month.
Yet the company faces headwinds with rising mortgage rates and a predicted slowdown in the housing market. This is reflected in the share price, which is down 39% since January.
Even so, Rightmove remains the go-to portal for buying and selling property in the UK, with an 84% market share. I expect it to easily survive any downturn and keep growing its profits for years to come.
Strong companies not only survive economic downturns, they usually emerge stronger from them. I think that’ll be the case with all three stocks here.
Experian has worked its way to the top of my buy list for November. With more bad economic news likely in the coming weeks, I’m waiting to see if Auto Trader and Rightmove shares fall further before pulling the trigger.
