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3 Contrarian Stock Picks That Could Surprise the Market in 2025
A new year means new opportunities. Some of 2024's market winners will flop, and some of its losers will rebound.
The S&P 500 is ending the year up about 24% after it fell last week on the Federal Reserve's most recent interest rate decisions. That's still an excellent gain for the year. What will happen next year? No one knows. There are bound to be some surprises. Roku(NASDAQ: ROKU), Wayfair(NYSE: W), and Peloton Interactive(NASDAQ: PTON) are three beaten-down stocks that could pull off a rebound.
1. Roku: More ads mean higher margins
Roku stock has been a disaster for the past few years, and even though it's up nearly 50% over the past six months, it's still 83% off its all-time highs. Will it ever go back there?
When Roku stock soared, it was a bull market with easy money and investors who couldn't imagine the market ever falling out. But that happened, and investors are, wisely, more cautious today. This market is less likely to support a high gain if the price isn't tethered to some tangible results or assets. The market might be too cautious in Roku's case, and there's room for the price to climb more.
Several factors are working in its favor right now to support that theory. It continues to grow its membership base and revenue while lowering expenses, and profitability is improving. The third quarter was the fifth straight quarter of both positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and positive free cash flow. Positive net income might be just around the corner.
Roku also benefits from moderating inflation and, therefore, increasing ad budgets. There's no question that it has a compelling ad platform, which more viewers join all the time. Viewing hours on the Roku channel, its free, ad-supported channel, increased 80% year over year in the third quarter. That's fueling some of its recent gains. The platform segment, which is mostly the ad business, is the company's higher-margin business, and that growth is leading to strong profitability.
At a price-to-sales ratio of less than 3, Roku looks primed to spring forward in 2025.
2. Wayfair: Poised to soar in a better housing market
Wayfair is in the same boat as Roku, but worse -- its pandemic outperformance was not only followed by slowing revenue, but its sales have even declined. However, Wayfair's online home furnishings platform looks like a no-brainer, and the market still thinks it can make a comeback.
It's been a rough couple of years, most recently due to a slow housing market. People are still waiting to buy a new home before they furnish it. This has not been a help to Wayfair's already difficult predicament, but despite the challenging environment, it's making steady progress where it should be. It lowered expenses in the third quarter year over year, lowering its operating loss, and improving its net loss.
Sales were lower, too, but revenue per active customer over the trailing 12 months increased 1.3%. That's where it's buttering its bread right now, and it's strategically investing in building these important relationships, because that's what's likely to fuel a rebound under better conditions.
Might better conditions be coming? It's a possibility as interest rates come down. However, they're still not down far enough to make a big change in the housing market yet, and the Fed's decision to slow the rate cuts might hamper that. Wayfair is doing an admirable job controlling what it can in the meantime.
Wayfair stock is 87% off its all-time highs and trades at the dirt cheap ratio of only 0.5 times trailing 12-month sales. It's not for the conservative investor, but for investors who can handle some risk, Wayfair could be a standout stock in 2025.
3. Peloton: A new CEO and improving profits
Peloton might be the prime example of a fallen-from-pandemic-highs stock. It shot up when people needed to work out at home, but that proved to be a transitory trend. Peloton stock is down a massive 94% from its all-time highs.
The company made several key errors in building too much infrastructure to meet rising demand, and it has yet to recover. It's cycling through CEOs, and revenue continues to slide.
However, there are signs of recovery. It's still working to right its cost structure and meet demand in this slower environment, and it's bringing down total expenses. There's a lot that's going into that, from cutting ad spending in low seasons to handing off certain operations to third parties and finding optimal retail outlets in different geographic regions.
Revenue declined 2% from last year in the 2025 fiscal first quarter (ended Sept. 30), but gross profit was up 6%, and gross margin expanded by 3.5 percentage points to 51.8%. Since 73% of revenue came from the subscription business, not the hardware business, Peloton has the potential to be a high-margin business when it gets its act together. The bottom line improved by nearly 100% to a net loss of under $1 million.
New CEO Peter Stern has a long history of experience with subscription businesses, and it's anyone's guess whether or not he can turn the company around. But it's certainly a possibility, and Peloton could be a surprise winner in 2025.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive and Roku. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.
