2 Comeback stocks to buy on the decline, according to Wall Street

While technology-related stocks helped S&P 500 index to new highs this year, investors have the chance to get attractive deals in the retail sector. Several top retail stocks are trading well above their highs, and Wall Street analysts are starting to see buying opportunities.

Let’s look at two beaten-down consumer brands that could be undervalued and have a major comeback, according to these analysts.

1. Chewed

chew (CHWY 1.63%) is building a leading online pet care brand in an estimated $147 billion industry, according to Statista. As the company grapples with weak consumer spending trends this year, shares are up 32% over the past three months and could rise, according to Goldman Sachs analyst Eric Sheridan.

Sheridan recently maintained a buy rating on the stock. At the company’s recent investor conference, Chewy CEO Sumit Singh made positive comments about active customer trends and long-term sales potential. Management believes the recent 3% year-over-year sales growth is below what it can achieve over the long term, which certainly seems feasible given the size of the pet care market. Chewy expects to grow its customer base in the low single digits and drive additional sales growth by increasing net sales per customer.

Chewy’s stock looks undervalued at a low price-to-sales ratio of 1.1 — well below the S&P 500’s average P/S ratio of 2.9. The company still has great potential to gain share in the pet care market and expand profit margins from services like pet care and sponsored advertising, which is not reflected by the low P/S multiple.

The stock’s low valuation could support near-term upside if investors decide Chewy is worth a higher P/S multiple, and that appears to be the case with the stock rising in recent months. There could be much higher earnings in the next few years if sales continue to improve.

2. Starbucks

Starbucks (SBUX -1.73%) shares have been hit by falling sales and increased competition, but the leading coffee brand is not standing still. He made a bold move in hiring CEO Brian Niccol Chipotle Mexican Grill. Shares jumped sharply on the news, reflecting investor expectations that Niccol’s record of driving profitable growth at Chipotle — and Taco Bell before that — would carry over to Starbucks.

BMO Capital analyst Andrew Strelzik recently maintained a buy rating on the stock following a recent update from Niccol on turnaround plans. Niccol sees several areas where Starbucks can do better, including in-store consistency, improving the in-store experience, and improving the menu.

While the analyst still sees headwinds for the company’s near-term earnings performance, Niccol’s hiring could be a game-changer for the business in the long-term. Starbucks previously aimed to reach 55,000 stores by 2030, up from last quarter’s number of more than 39,400 company-operated and licensed stores. Niccol should maximize Starbucks’ revenue growth potential while also finding ways to grow revenue faster than revenue through higher margins, as he did at Chipotle.

The stock trades at a market-average price-to-earnings ratio of 27, but Starbucks’ premium brand in the hands of a star CEO could lead to improved earnings growth that generates excellent returns in the coming years.