Have you ever heard of dumpster diving?

No. I’m not talking about literal dumpster diving, where you salvage discarded items in a dumpster or trash can.

I’m talking about financial dumpster diving, which – much like real dumpster diving – involves digging through today’s trash to find tomorrow’s treasure, or more specifically, is the process of sorting through beaten-up, left-for-dead stocks in hopes of finding one that could bounce back.

Wall Street history is littered with examples of dumpster diving success stories.

Consider Best Buy in 2012, when everyone thought bankruptcy was inevitable and Best Buy stock had plunged from $40 to $10. Today, shares trade north of $100.

Consider Nintendo in 2013, when everyone thought the gaming titan had lost its magic touch and the stock also dropped from $40 to $10. Today, Nintendo stock trades above $60.

Or consider Twitter in 2016… Crocs in 2017… Chipotle in 2018… Tesla in 2019… Wayfair in 2020…

The list goes on and on.

Dumpster diving has a long track record of scoring investors huge returns.

To be sure, dumpster diving is also very risky. Most stocks in the dumpster belong there. They are trash.

In order to succeed in this game, you have to pick the right stocks.

And that’s why we’re here.

Today, we will tell you about one beaten-up, left-for-dead, e-commerce stock that we believe represents the best turnaround story in the market today. When all is said and done, this small stock could earn a place in the dumpster diving Hall of Fame.

A Value-First mCommerce Platform With Huge Upside Potential Over the Next 12 Months

Once upon a time in college, I stumbled upon a mobile commerce (mcommerce) app called Wish.com.

My friends had told me that it was a cool place where you could buy super-cheap knock-off clothes from China for 80% or more off their retail price. The clothes, they warned, weren’t great – but they weren’t bad, either, and considering you could get a pair of shoes for about five bucks, my friends deemed the products “worth it.”

So, I gave it a try. I bought a blazer for $10. It arrived in the mail about a week later. It looked fine. It fit fine. I wore it on a few dates, and was happy with the purchase. But then business took over my life, shopping became a thing of the past, and I forgot all about that blazer and Wish.com.

Fast forward seven years…

That blazer is still in my closet, but more importantly, Wish.com is now a publicly listed company under the name ContextLogic (NASDAQ:WISH), that has more than 100 million monthly active users across over 100 countries, is clearing $2.5 billion in sales, and which is growing at a 30%-plus year-over-year pace.

Talk about a success story.

Yet, when I looked at ContextLogic stock, I was somewhat surprised to see that it was trading at just $8 per share – down 67% from its $24 IPO price in just six months!

I dug a bit deeper… and I liked what I found.

Here’s the story.

Wish.com is a value-first mobile commerce platform that relies heavily on data science to attract and retain customers.

The company – which was founded by a former Google engineer and which includes multiple former tech execs on its management team – relies heavily on data-driven advertising to put outlandish ads (“$5 for a Rolex watch”) in front of targeted consumers on social media feeds, on the idea that those ads are crazy enough and interesting enough to get consumers to download the Wish app.

Then, once in-app, Wish pushes you to sign up with Facebook or some other social media account, so that Wish can leverage all that data to create a personalized feed of products for you. Those products will mostly be super-cheap, often low-quality, knock-off products sold from merchants in China.

At that point, consumers are on a “treasure hunt” to find legit products at blockbuster prices, and when they find one, they are over-the-moon excited about it.

That’s the Wish.com experience.

To be sure, that shopping experience is not for everyone. In fact, it’s not for most people. But it is for some people, and for those people, it’s quasi-addicting.

Wish has 107 million active users, and its user cohort analysis shows that people who buy once on the platform, tend to get hooked into the “treasure hunt” and use it more and more every single year.

I like this about Wish.

The platform knows what it is, and it doesn’t pretend to be something it’s not. It’s a gimmicky, value-first mobile commerce platform that relies on data science to provide consumers with rewarding treasure hunts. That limits Wish’s addressable market – but it also limits competition.

In this market, Wish.com stands alone. It is the world’s most dominant and unrivaled value-first mobile commerce platform.

If so, then why is the stock down so much?

Three things.

One, user growth went negative last quarter. Two, its new logistics business – where ContextLogic provides logistics services for its merchants – is growing more quickly but has lower margins. Three, EBITDA losses are widening.

All of these headwinds are short-term in nature.

Negative user growth is a function of the fact that Wish’s targeted demographic skews at the lower end of the income spectrum – and that’s the part of the labor market that was hit hardest by Covid-19. By the same token, it will be the part of the labor market that recovers quickest in 2021/22, and so user growth trends should meaningfully accelerate as Wish’s core demographic becomes more financially stable.

The new logistics business has lower margins today. But management fully expects economies of scale to kick in for that business soon, and has maintained its long-term gross margin target of above 70%.

Widening EBITDA losses are a function of the first two headwinds. Once those headwinds turn into tailwinds, EBITDA losses will narrow, and eventually turn positive. Management’s long-term target is for 20%-plus EBITDA margins.

In other words, the recent weakness is ContextLogic stock is grossly overdone.

More importantly, the upside potential is enormous.

Just consider: This is an e-commerce stock… trading at 1.6X forward sales… when those sales are growing at 20%-plus… and when the average price-to-sales multiple in online retail is 4.5X.

There is huge room for share price appreciation here through both robust sales and earnings growth, and significant multiple expansion.

And that’s why investors willing to go “dumpster diving” should consider taking a position in beaten-up ContextLogic stock today.

— Luke Lango

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Source: Investor Place