Will This Ultra-Cheap Stock Rebound Strongly Soon?

Roots Corporation (TSX:ROOT) could be an interesting rebound play.

| More on:
edit U-turn

Image source: Getty Images

The pandemic has impacted some companies far more than others. Tech stocks surged last year while the rest of the economy has been recovering this year. One stock that seems to have missed out is apparel retailer Roots (TSX:ROOT).

Roots stock had a mild recovery but has dipped in the second half of the year. The stock has lost 25% of its value since hitting a two-year high of $4.13 at the end of June.  Despite this dip, it’s up 20% year to date, which is in line with the rest of the stock market. 

Why is this retailer being overlooked, and could its recovery in 2022 be stronger than its peers? Here’s a closer look.

Waning sentiments

Roots stock has come under pressure ever since the provider of apparel, leather goods, footwear, and accessories delivered disappointing second-quarter results for the period ending in July. Net loss in the quarter landed at $1.2 million. Net sales, meanwhile, improved only slightly to $38.9 million from $38.2 million delivered the same quarter last year.

The retailer has been one of the hardest hit amid the pandemic. During the second quarter, 60% of its store remained closed compared to just 45% the same quarter last year. 

Roots worsening sentiments in the market stem from the fact that it has underperformed compared to other apparel retailers that have bounced back on focusing on e-commerce. However, the company is looking to change its fortunes by focusing on product innovations and marketing partnerships. Increased focus on e-commerce is also likely to bolster the company’s prospects.

With the easing of the COVID-19 restrictions, the company could post solid results for its third quarter, with results due on December 14, 2021. Meanwhile, the stock price reflects a deeply pessimistic outlook for the company. 

Valuation

Roots stock currently trades at just $2.95. That’s significantly lower than its all-time high of $13.5 set in 2018. Much of this decline is because of the pandemic and the company’s lacklustre e-commerce performance. 

However, it could be argued that Roots is underpriced despite these weaknesses. The stock trades at a price-to-earnings ratio of just 7.6. If the new variant of the virus isn’t as concerning as some expect or if Roots can sustain some growth in its e-commerce segment, this valuation could quickly change. 

The reopening is perhaps the biggest catalyst. If Roots can raise the shutters on most of its 68 outlets in time for the Christmas shopping season, shareholders could be in for a windfall. Keep an eye on this high-risk, high-reward retail play for the months ahead. 

Bottom line

Roots has been battered worse than most other retail stocks. The company lost most of its market value since 2018 and roughly a quarter in the last few months. However, if the team is allowed to reopen physical stores in time for Christmas this year, the stock could surge higher. As it stands, it’s priced for the worst-case scenario.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

A bull outlined against a field
Dividend Stocks

3 Cheap Stocks I’d Buy Before the Bull Market Arrives

Undervalued TSX stocks such as Savaria and Well Health can help investors generate market-beating gains when markets recover.

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Investing

2 Top REITs You Can Buy and Hold Forever

These two top REITs are among the best options for long-term, buy-and-hold investors in this current uncertain market.

Read more »

Aircraft Mechanic checking jet engine of the airplane
Investing

Could Bombardier Stock Be a Big Winner in 2023? 

Bombardier stock outperformed the TSX Composite Index last year by executing its turnaround. Could it continue the momentum in 2023?

Read more »

Increasing yield
Dividend Stocks

5 Canadian Dividend Stocks With Yields of 4% or More

If you want dividends that yield over 4%, you don't have to look far. Here are five large-cap Canadian stocks…

Read more »

Man making notes on graphs and charts
Investing

3 Cheap Stocks I’d Buy Before the Market Erupts

Here are three cheap stocks that are well positioned to reward investors in the months ahead.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Investing

Looking for Yield? 2 Top Bond Proxies Could Be Just the Ticket

Here's why SmartCentres REIT (TSX:SRU.UN) and Rogers Communications (TSX:RCI.B) are two top bond proxies worth buying right now.

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

2 Energy Stocks That Could Hold Up if Oil Prices Turn

Suncor Energy (TSX:SU) and Cenovus Energy (TSX:CVE) are great energy stocks that could continue higher through 2023.

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

3 Blue-Chip Dividend Stocks I’d Buy Over and Over

These three dividend stocks are some of the best stocks to buy right now to create strong income not just…

Read more »