The rise of artificial intelligence has propelled several top stocks to new heights, driving the broader market along with them. The S&P 500, led by AI-flavored names like Nvidia and Amazon, has surged 16% year to date. While an overvalued market poses challenges for investors seeking bargains, there are still undervalued stocks that hold potential for wealth creation. Two Fool contributors, Keith Noonan and Jennifer Saibil, have identified Nike and Dutch Bros as top stock picks worth considering.
Keith Noonan highlights Nike as an underappreciated turnaround play and a dividend growth stock. The company’s valuation has become attractive due to significant sell-offs, with its dividend yield currently at a historic high of approximately 2%. Nike’s share price has plummeted 32% year to date and 59% from its lifetime high. The company’s growth strategy, particularly in China, has faced headwinds due to macroeconomic pressures and rising competition from domestic brands. Nike’s recent quarterly report and forward performance targets reflect these challenges, with a 2% decline in revenue year over year and an anticipated 10% sales drop in the first quarter of the current fiscal year. However, the current market conditions present an opportune time to invest in Nike for the long term. The company’s forward price-to-earnings ratio has dropped to around 23, making it appear cheap on a historical basis. With a dividend payout ratio of approximately 38%, Nike has room for continued distribution growth. While near-term business performance may not be remarkable, long-term investors who adopt a buy-and-hold approach at current prices could potentially achieve market-beating returns.
Jennifer Saibil focuses on Dutch Bros, a rapidly growing coffee chain that offers an alternative to Starbucks. Dutch Bros has gained popularity for its fun and relaxed atmosphere, lower prices, and flexible store-building approach. Although primarily based in Oregon with a strong presence on the West Coast, Dutch Bros is expanding across the United States and capturing market share. In the first quarter of 2024, the company experienced a 39% year-over-year increase in revenue, largely driven by new store openings. With just over 800 stores compared to Starbucks’ 17,000 U.S. locations, Dutch Bros has ample room for further expansion and revenue growth. Comparable sales growth is also on the rise, with a 10% increase over the previous year. This growth has led to expanded margins and profits, with net income reaching $16.2 million in the quarter, up from a $9.4 million loss in the same period last year. Despite a 49% decline from its all-time highs, Dutch Bros’ stock has been climbing this year, indicating its potential for long-term value.