We recently compiled a list of the 10 Best Value Penny Stocks to Invest in Now. In this article, we are going to take a look at where Destination XL Group, Inc. (NASDAQ:DXLG) stands against the other value penny stocks.
The US market has been resilient over the past years despite higher interest rates, however, recent reports showed a sharp decline in the growth of the U.S. job market. According to reports from the Labor Department, the economy added just 114,000 jobs in July compared to 179,000 in June. This marks a sharp drop in employment generation from 482,000 in January 2023, raising the unemployment rate to 4.3% in July 2024, the highest level in nearly 3 years. The significant slowdown in hiring can potentially make the economy vulnerable to recession and therefore leads to an ease in monetary policy guaranteeing an interest rate cut in September. Economists are calling for a 50 basis point reduction in borrowing costs.
With the current uncertainty in the market and delay in rate cuts, investors are worried about a possible recession. The question is should investors pick penny stocks to diversify their portfolios? Penny stocks, though cheap, are without any doubt risky investments with a high rate of volatility and are even more sensitive to monetary policy changes. A higher interest rate negatively affects stocks’ earnings performance because these stocks are mostly running on debt and, therefore, can benefit from a possible rate cut in September 2024.
Moreover, these stocks are prone to speculative trading and scams, and therefore, are suitable for investors that can do diligent research and have a high tolerance for risk. However, not all stocks are the same and investors may yet benefit from long-term investments in high quality penny stocks with strong fundamentals. Value investing is an investment strategy focused on finding stocks that are being traded for less than their intrinsic or true value. In other words, value stocks are undervalued by the market and can be rewarding long-term investments once the market realizes their true value.
Investing in small-cap penny stocks is no doubt risky owing to their high volatility and low liquidity, however, using the value investing strategy one can generate long-term profits from investing in these stocks.
Investing in Small-cap Stocks in 2024
Most penny stocks have small market caps. Large-cap stocks generally dominate the market outperforming small-caps, and last year was no different as the large-cap stocks beat small-cap stocks by an average of 9.6 percentage points. Moreover, in 9 out of the last 10 years, large caps outperformed penny stocks, however, small caps showed competitiveness back in the days of the internet boom, when the dot-com bubble was breaking in the period 1999 to 2004.
There is hope for a small-cap rebound in 2024, and that is because the historical trends tell us that after nearly a decade of underperformance, the tables turn and small-caps, which include many penny stocks, can rebound. Moreover, in the fourth quarter of 2023, penny stocks showed a recovery in growth and this could set the stage for a renaissance for the small-caps in 2024.
In a recent interview with CNBC, Fundstrat’s head of research, Tom Lee expressed optimism about the potential rise of small-cap stocks in 2024 owing to the softening of inflation in June. Tom Lee further discussed the performance of the small-cap stocks that rose 30% in 8 weeks from October to December 2023. Lee believes that the current rally can be even more substantial compared to last year as it’s driven by factors like larger institutional short positions, small-cap even more oversold, and valuations like median P/E at 10 times 2025 earnings. In addition, June’s Consumer Price Index has declined to its lowest level in the last 3 years, this can lead to the feds cutting the interest rate expected in September 2024. According to the estimates of Tom Lee, in case the interest rate is cut down, the small caps can gain as much as 50% in 2024.
Secondly, presidential elections have been historically in favor of these stocks, research shows that seven out of eleven election times, the small-cap outperformed by an average of 2.68 percentage points.
The recent consumer price index data released in June 2024, suggests a deceleration in inflation, the prices are getting stabilized particularly in core consumer segments such as shelter and food. According to the latest Inflation report, the Personal Consumption Expenditure index (PCE) rose by 0.1% from April matching the Wall Street expectations. Furthermore, the report shows a growth of 0.5% in personal income in the U.S. which is up by $114.1 billion. This potential relief to consumers can stabilize the US market and might influence the Federal Reserve’s Monetary policy decisions in favor of small-cap by cutting interest rates as expected by the end of 2024.
Methodology:
To compile this list of the 10 best-value penny stocks to invest in, we used a screener to narrow down penny stocks trading under $5 on the basis of relatively lower forward p/e ratios compared to their respective industry averages. We further screened these stocks by using metrics like institutional ownership of greater than 40% and ensured that the companies had positive upsides based on analysts’ consensus.
After shortlisting the stocks based on the above-mentioned value metrics, we ranked those stocks based on hedge fund sentiment towards each stock. To rank the penny stocks, we assessed Insider Monkey’s database of hedge fund sentiment of 920 elite hedge funds and their holdings tracked at the end of the first quarter of 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A man wearing the company’s big and tall clothing looking stylish and confident.
Destination XL Group, Inc. (NASDAQ:DXLG)
Number of Hedge Fund Holders: 11
Destination XL Group, Inc. (NASDAQ:DXLG) is a specialty retailer of big and tall men’s clothing and shoes in the U.S. The company offers a wide range of apparel like dress wear, casual clothing, sportswear, polo shirts, and T-shirts specifically designed to fulfill the clothing needs of men with big stature.
Apart from retail stores the firm also operates through e-commerce, which gives big men the freedom and comfort to choose their preferred clothing online. Research suggests that around 14.5% of the U.S. men’s population is 6 feet or taller, and a lot of men struggle with choosing clothes that fit.
The plus-size market was valued at $288 billion in 2023 and is expected to reach $501.35 billion in the next ten years. The social adaptation of body positivity campaigns largely drives the fast-paced growth of the plus-size market. Given the fact that there is high market potential fueled by body positivity, there is a lot of room for companies like Destination XL Group, Inc. (NASDAQ: DXLG) to grow.
Destination XL Group, Inc. (NASDAQ:DXLG)’s sales went down by 7.9% from $125.4 million in Q1 2023 to $115.5 million in Q1 2024. Furthermore, the net income of $3.79 million was down by 45.6% YoY. However, the company completed its $25 million stock repurchase program by the end of Q1.
The decline in sales performance was attributed to macroeconomic pressures first observed in the second half of the 2023 fiscal year that continued to reduce consumer demand and online traffic. Moreover, the lack of brand awareness owing to delays in starting a brand-building campaign affected the sales. Apart from a lack of awareness, the dearth of short-distance retail stores also had an impact on sales.
In an effort to improve sales, the company is committed to implementing its growth initiatives which will provide meaningful catalysts to derive sales and grow its share in the Big and Tall market. One of the initiatives is the launching of a new brand advertising campaign on May,13 to address the lack of brand awareness for the DXL offering. The last campaign of such a scale was carried out seven years ago back in 2017.
In addition, the company is set to open new shop outlets to address the consumer demand for easily accessible retail stores. To this end, a new store was opened in May this year with six more to follow. Online shopping is trending in the aftermath of the Pandemic, and the firm is focused on enhancing consumer experience by transitioning to a new and improved E-commerce platform.
Over the past year, Destination XL Group, Inc. (NASDAQ:DXLG) stock price has declined over 26%, the company struggles with quarterly decreases in revenue amid macroeconomic pressures and changing market trends. However, we do know that strong fundamentals of a stock may yet drive long-term growth. Let’s have a look at the Return on Equity (ROE) value which signifies a company’s profitability, the metric is calculated by dividing a firm’s net income (through continuing operations) by the stakeholder’s equity. This metric helps gauge how efficiently a business can generate profit over time.
Destination XL Group, Inc. (NASDAQ:DXLG) has a 12-month trailing operating net income of $37.67 million and stakeholder’s equity of $153.55 million for the same period. The trailing 12-month ROE value is 0.24 or 24%, which means the company generated $0.24 in profit for every $1 of shareholder’s equity. In comparison, the Apparel industry in the U.S. as of July 2024 had an average ROE of 16.9%.
Though the company had a downfall in its stock price in recent months yet if we look at the past 5-year performance, Destination XL Group, Inc. (NASDAQ:DXLG) has strong growth figures. The firm reported a 54% net income growth and even surpassed the industry’s growth of 26.6% in the same period, this shows the company’s growth potential reflected in its ROE.
According to Insider Monkey’s database, 11 hedge funds held stakes in the Destination XL Group, Inc. (NASDAQ:DXLG). Royce and Associates group is the largest stakeholder with total shares valued at $6.72 million.
Overall DXLG ranks 7th on our list of the best value penny stocks to buy. While we acknowledge the potential of DXLG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DXLG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.