When a company gets kicked out of a prestigious stock index, it’s often seen as a red flag. But surprisingly, research suggests that these cast-offs can actually outperform the market in the long run. A recent study analyzed stocks removed from major indexes like the S&P 500, Nasdaq-100, and Russell 2000, and found that they went on to beat the broader market by a significant margin over the next five years.
One company that recently got the boot from the S&P 500 is Etsy, a creative e-commerce platform that’s been struggling to regain its footing after a pandemic-fueled surge. Despite its challenges, Etsy has a unique value proposition that sets it apart from giants like Amazon and Walmart. Its focus on empowering small businesses and offering one-of-a-kind products has driven impressive sales and free cash flow growth over the past few years.
However, the company’s valuation has taken a hit, plummeting from $30 billion to just $6 billion. This steep decline has created a buying opportunity that savvy investors shouldn’t ignore. With a cash return on invested capital of 40% and a robust free cash flow margin of 25%, Etsy has the potential to outperform the market. Its aggressive share buyback program has already reduced its share count by 9% in just three years, and history suggests that companies with strong free cash flow generation and hefty share repurchases tend to outperform the overall market.
Etsy’s mobile app is another area of untapped potential. With only 45% of its buyers using the app, there’s significant room for growth. If the company can successfully convert more buyers to its mobile app, it could lead to a surge in purchases and revenue. And with its stock trading at a once-in-a-decade valuation, Etsy looks like a compelling investment opportunity. Even if the company takes time to recover, its buybacks will become increasingly valuable, making it a potentially lucrative long-term bet.
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