Is It Time to Buy the S&P 500’s 2 Worst Performing Stocks in May?

After rallying in April, the S&P 500 index posted much much smaller gains in May. The popular benchmark index’s level climbed 0.55% in the month, and some of its stock components posted significant sell-offs across the stretch.

^SPX data by YCharts

Investors continued to tread cautiously with growth-dependent technology stocks. Companies that could see tailwinds recede as consumers head back to in-person shopping as coronavirus-related pressures ease in some territories were among the biggest losers in the S&P 500 last month. However, recent pullbacks have also made some companies into more attractive investment candidates.

Read on to find out which two stocks took the dubious honors of being May’s worst-performing S&P 500 stocks — and whether now could be the right time to build positions in these companies.

Image source: Getty Images.

Dollar Tree

With its share price dipping roughly 15.1% across May’s trading, Dollar Tree (NASDAQ: DLTR) closed out the month as the S&P 500’s second-worst-performing stock.

DLTR data by YCharts

With economies in some territories beginning to ramp back up and more shoppers heading back to brick and mortar locations, that might seem like a recipe for Dollar Tree stock to post solid performance. However, the company’s first-quarter results arrived with some information that spooked the market, and shares came under pressure following the release.

Dollar Tree reported Q1 earnings on May 27, and the company’s share price suffered a substantial pullback following the results. The company’s diluted earnings per share came in at $1.60 for the period, representing a 53.8% increase year over year, while revenue in the period climbed 3% to reach $6.48 billion. Sales and earnings for the period actually came in significantly ahead of the market’s expectations, with the average analyst estimate having called for per-share earnings of $1.40 on sales of $6.4 billion.

Unfortunately, the company’s earnings guidance for this year fell short of the market’s targets. Management is guiding for earnings per share between $5.80 and $6.05 for the year, while the average analyst estimate was guiding for annual per-share earnings of $6.24. Dollar Tree is seeing a significant rise in shipping costs, and rising expenses are expected to eat into profitability.

The full-year earnings guidance indicates the company is facing some headwinds, but the core business still looks pretty solid. Challenging economic conditions remain, and many shoppers are still making purchases with a bargain focus in mind and economic uncertainty on the horizon. If you were waiting for a chance to start a position in Dollar Tree stock or add to existing holdings, the recent sell-off could be a worthwhile buying opportunity.

Etsy

Many growth-dependent e-commerce stocks have taken a hit as investors have shown increasing preference for value-oriented reopening plays. Etsy (NASDAQ: ETSY) came in as the S&P 500’s biggest loser last month despite posting strong earnings results early in the month, and like Dollar Tree, guidance that underwhelmed the market was the main driver of the sell-off.

ETSY data by YCharts

Etsy posted earnings per share of $1.00 on sales of $550.6 million, while the average analyst estimate had called for per-share earnings of $0.97 on revenue of $530.4 million. Earnings in the quarter were up a staggering 900% compared to the prior-year period, and sales climbed 141.5%.

However, the company sees growth slowing considerably in Q2, and investors moved out of the stock in response to management’s guidance. The company expects sales to grow between 15% and 25% in the second quarter, which is admittedly a big step down from its recent sales growth.

It’s reasonable to expect that near-term growth for many e-commerce companies will be significantly less impressive compared to blockbuster figures delivered over the last year. Pandemic-related conditions prompted a surge in online shopping activity, and Etsy and other players in the space are facing challenging comparisons.

The flipside is that overall e-commerce industry still looks primed for big growth over the long term, and Etsy appears sufficiently differentiated to continue attracting new users and benefiting from momentum in the overall online retail space.

As of this writing, Etsy stock trades down roughly 34.6% from the lifetime high that it hit a few months ago. With the stock taking a breather after posting explosive growth, risk-tolerant investors may want to consider building a position in the company.

Sell-offs can be opportunities, but keep risk tolerance in mind

If you’ve got your financial bases covered, stock sell-offs can create opportunities to build positions in quality companies at a discount. That doesn’t mean that investors should rush to buy every time a stock sees a big pullback, as stock sell-offs typically happen for a reason. It’s important to calibrate your risk tolerance with your individual financial situation and invest in companies that have solid long-term prospects.

On the other hand, there are realistic bull cases for both Dollar Tree and Etsy, despite the companies ranking as the S&P 500’s worst-performing stocks last month. If asked to choose between the two stocks, I think that Etsy looks like the better long-term buy. However, Etsy’s valuation is also more growth-dependent compared to Dollar Tree, and the bargain-focused retailer may be a better fit for investors who are prioritizing reopening plays or companies with less growth-dependent valuations.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Etsy. The Motley Fool has a disclosure policy.

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