Perhaps the hottest event happening in the market right now is the meteoric rise in meme stocks. Because shares of these companies go up rapidly, investors are seeing mouthwatering returns in a very short amount of time. What’s more, companies that were once struggling can use these rallies to raise much-needed cash to pay back debt or expand their businesses. The unsung heroes of the story are really the short-sellers, however, who are footing the bill for all this.
Speaking of good meme stocks, Hims & Hers (NYSE:HIMS) and ContextLogic (NASDAQ:WISH) are both much-shorted, undervalued companies that are up 15% and 50%, respectively, in the past five days. Let’s look at why they are strong buys right now.
1. Hims & Hers
Hims and Hers is a telemedicine start-up that is seeking to disrupt the healthcare industry. Like most industry peers, it offers 24/7 primary care along with an online pharmacy. However, the company’s most distinguishing feature is its focus on over-the-counter (OTC) health products.
Hims & Hers’ services focus on treating hair loss, erectile dysfunctions, fertility, sexual health, anxiety, and depression, as well as sleep disorders in both men and women. It also plans to offer chronic care options for patients with diabetes or high cholesterol.
During the first quarter of 2021, the company shipped 687,000 orders for the above products, representing a growth of 25.8% in the past year. At the same time, its revenue increased by an astonishing 74% to $52.3 million. Short-sellers mainly were betting against the company in anticipation of a decline in telehealth demand as the COVID-19 pandemic subsides in the U.S. But, as we can see, that really didn’t happen.
Even after the rally, Hims & Hers stock is trading at 13 times revenue, which isn’t expensive given the abnormal level of growth it generates. In addition, its business model is easily scalable; it can partner with distributors, or even celebrities, to bring new OTC products on its platform for its subscribers — as with its recent partnership with Alex Rodriguez to launch its new skincare solution. Overall, it’s a fantastic healthcare growth stock to buy now.
2. ContextLogic (Wish)
Wish is an e-commerce platform like no other. It features a vast selection of cheap, unbranded items from China. Think of it as an online dollar store. It is ideal for customers who want the cheapest products, couldn’t care less about the shopping experience, and don’t mind waiting a long time in exchange for paying ridiculously low shipping fees.
The company serves more than a niche market. In Q1 2021, its total revenue increased by 75% year over year to $772 million. Logistics revenue was up by a whopping 338% to $245 million, driven by increasing merchant adoption of its shipping solutions.
As with Hims & Hers, many short-sellers expected a decline in sales post-COVID as consumers switched from low-quality value products back to branded ones — which sort of happened. For this quarter, Wish expects to grow its sales by just 2% compared to last year.
But the stock already has that news priced in. At 2.3 times sales, Wish stock is far cheaper than the industry average of 4.5 times revenue. Moreover, the company is diversifying out of China and is partnering with local stores to drive product sales.
The company already has 53,000 local stores in 50 countries (such as Mexico and Brazil) utilizing its platform, with 1,000 new stores added in Q1. Going forward, expect continued strength in emerging markets to spearhead its growth.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. 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.