If you have a winning stock on your hands sometimes it's best to just let it ride rather than shorten the profit potential. For those that don't own such runaway winners, buying in can feel like showing up when the party is winding down. But in reality, the party may just be getting started.
Momentum stocks that have enjoyed long stretches of big gains can keep chugging higher if new or existing catalysts are in place. In the case of L Brands, Paypal, and Etsy, there is good reason to believe the show will go on. All three stocks more than doubled in 2020—and are being waved in to third.
Why is L Brands Stock Doing so Well?
Given the challenges faced by clothing retailers during the pandemic, L Brands (NYSE:LB) stock has been one of the most unlikely of winners. After advancing 105% last year, it is already up 30% in 2021.
L Brands is the company behind lingerie, beauty, and personal care brands Victoria's Secret, Pink, and Bath & Body Works. It has strung together a couple of impressive quarterly performances in which sales and earnings have far exceeded analyst expectations. Last quarter L Brands delivered 28% comp sales growth led by a 56% jump in sales at Bath & Body Works.
Why the sharp outperformance? First, management's decision to run Bath & Body Works and Victoria's Secret as separate companies is proving to be astute. A year ago, L Brands announced a deal to take Victoria's Secret private only to later terminate the agreement. While the Victoria Secret's business continues to struggle, a standalone Bath & Body Works is thriving on its own.
Despite Bath & Body Works stores being traditionally located in shopping malls and outlets, sales have been outstanding. Both the brick-and-mortar and e-commerce platforms are seeing strong demand for soaps, lotions, and other personal care products as consumers adopt a fresh focus on cleanliness and hygiene during the pandemic.
L Brands has a lot going for it these days including surging sales and an expanding gross margin. A robust holiday season and strong January results point to another above consensus performance when the company reports next week. L Brands clearly passes the smell test and looks well on its way to $60.
Can Paypal Stock Keep Going Up?
After a 117% return in 2020 Paypal (NASDAQ:PYPL) shares have climbed another 24% so far this year. The former Ebay division is reaping the rewards of a sharp increase in the number of payments taking place on digital and mobile platforms. While most traditional retailers have struggled in the pandemic economy, many online retailers are thriving—and this suits Paypal just fine.
Nowadays, even for traditional retailers, having an online presence is essential to survive. As consumer transactions continue to shift online, Paypal's well-established merchant solutions and growing account base will make it much more than a pandemic story.
New offerings like short-term installment product "Buy Now, Pay Later" and the Venmo credit card stand to keep consumers engaged in Paypal's growing world of payments. Its largest growth catalyst may its foray into cryptocurrency.
The company's ambitious plans to launch a cryptocurrency exchange and to make Bitcoin and other digital currencies a purchase option for its 28 million merchants represent a huge new growth avenue. Meanwhile, the buyout of online shopping program Honey, which is popular with Millennials, is yet another growth rocket that is just getting off the ground.
Accelerating payment volumes and management's bullish 2021 guidance suggest Paypal stock will have another stellar year. Most sell-side analysts still call Paypal a 'buy' and several have price targets that are well into the $300's.
While Paypal's lofty valuation and intensifying competition in the global payments industry are legitimate concerns, there seems to be little in the way of slowing down this train. Analysts and investors love it, and its heading for its sixth straight year of green returns.
Is Etsy Stock Overvalued?
Etsy (NASDAQ:ETSY) was actually well beyond a two-bagger last year soaring more than 300%. Why not tack on another 23% gain year-to-date for the surging e-commerce marketplace.
On the strength or elevated consumer demand for unique homemade goods and knick-knacks during the stay-at-home economy, Etsy's sales are expected to have doubled in 2020.
The market appears to be blind to Etsy's forward P/E ratio above 100x instead of believing that the multiple is justified given the growth ahead. While sales of masks and home décor items will probably stay strong, Etsy has bigger things in mind.
The company is seeking to spread its wings outside the world of hard-to-find handcrafted goods and compete in the broader e-commerce space. Rather than hiding out in the specialty corner of online retail, Etsy sees itself becoming part of the $1.7 trillion global retail market. Its growing stable of buyers and sellers gives it a formidable launching pad from which to take on the Amazons of the world.
It's conceivable that people who love and trust the Etsy experience would branch out into other product categories as they are introduced. Bringing in new customers and convincing loyal Amazonians that there is an alternative will be the bigger challenge, but Etsy appears up for it.
As Etsy expands into the more mainstream parts of retail and stretches its global footprint, its exposure to a much larger addressable market may lead to a whole new level of growth. Based on management's execution and ability to find ways to grow in its current market, its hard not to see Etsy stock crafting another magical run.
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