2 Former S&P 500 Stocks Down 81% and 25% That History Suggests Buying at Once-in-a-Decade Valuations

Core Insights - Stocks removed from major indexes like the S&P 500 often lose appeal, particularly among professional investors, leading to significant price declines [1] - Historical data indicates that these stocks can outperform their indexes by five percentage points annually over the next five years after removal [2] Group 1: Etsy - Etsy generates 82% of its revenue from sellers identifying as a "business of one," offering a unique product range compared to larger retailers [5] - The company experienced a sales surge of over 100% during the pandemic, but growth has since slowed to single digits, resulting in an 81% decline from all-time highs [6][3] - Currently, Etsy trades at 11 times free cash flow (FCF), near historical lows, and only 15 times FCF when accounting for stock-based compensation [7] - A reverse discounted cash flow (DCF) analysis suggests Etsy needs only 4% annual FCF growth over the next decade to be an attractive investment [8] - In Q3, Etsy added 3 million app downloads, indicating potential for growth, as buyers through the app have a 40% higher lifetime value [9][10] - With a 22% FCF margin, Etsy has the capacity to buy back shares, having reduced its share count by 4% annually over the last four years [11] Group 2: WK Kellogg - WK Kellogg, known for brands like Frosted Flakes and Special K, was cast aside after its spinoff from Kellanova in 2023, trading 25% below its highs [12][13] - The company trades at a low EV-to-EBITDA ratio of 7, significantly cheaper than peers like General Mills and Post Holdings [14] - Kellogg is guiding for mid-teens EBITDA margins by 2026, following a $500 million investment to modernize its supply chain, which could lead to substantial undervaluation if successful [14] - The company raised its adjusted EBITDA growth guidance for 2024 to 5%-6% and increased its adjusted EBITDA margin to 10.5% for the first three quarters of 2024, indicating early progress [15] - Despite modest industry growth projections of 2% annually through 2029, Kellogg's current valuation suggests it is priced for minimal growth, presenting potential for market-beating returns [16][17]