Hidden Gem Stocks We Love at the End of the Year

0:04Do you still have some items to buy on your holiday shopping list? What about your holiday stock shopping list?

0:20Today is Thursday, December 18th. Welcome to Motley Fool Money. I'm your host today, Jason Hall, and I'm joined by Motley Fool analysts, Dan Kapliger and John Quass to discuss some of our favorite hidden gem stocks that look like great buys as 2025 comes to a close. Get ready for a fun, foolish roundtable discussion. If I say hidden gems, you probably think I'm talking about small esoteric companies that nobody's ever heard of, right? That's true, but it's not the only place that you can find hidden gems. And on today's show, we have three giants and their respective industries. Airbnb is one of those dominant companies.

0:58And John, you brought it to the table. It's a name that people think of when describing the entire short-term stays industry. now, it's become the verb too. Since the first day of trading post IPO, the stock's up almost double, but it peaked like a month later and it's way down since then in early 2021. John, why is this on your list as a hidden gem stock worth buying? Yeah. Well, let me give you my elevator pitch here for Airbnb to start it off. So people aren't giving up this short-term rental model. Airbnb is the dominant player in this space, and I think it has a brand moat. It's printing cash like few companies do.

1:42Eventually, these factors should make Airbnb stock a winner. I know it hasn't performed great in recent years, but I think that it will eventually catch up. Let's talk about one of the traits I like of a hidden gem, And that's reasonable growth in an expanding market. So Airbnb is growing its revenue at a double-digit pace, 10 % in the most recent quarter, expecting high single-digit in the upcoming quarter. But it's not red hot, but that is reasonable growth. And there's market research pointing to ongoing growth in this space as a whole. And AirDNA is one of the third parties that puts out reports on this.

2:22And what's so interesting to me is that AirDNA has showed that there are rental property owners who are willing to put their listing on multiple platforms. And that's kind of the majority. But if you're only listing exclusively, you're not listing with Airbnb's competitors. You're listing on Airbnb exclusively. And so it's either Airbnb alone or Airbnb Plus, but never without Airbnb. That, to me, shows the moat here. and one of the reasons I like it in this expanding market. There's more you like too. Yeah, for sure. So I also like companies that exhibit this trait of having this relentless drive and curiosity to finding new business opportunities.

3:05Airbnb is definitely one of those. So it's invested$200 million this year in experiences and services. And when you look at its bookings in the third quarter, half weren't attached to a place to stay. I'm talking about its experiences and services. So people stay in a new place and maybe they'll book an experience on top of that. But half of the experiences now don't have a place attached to it. So they're doing it exclusively for the experience. And that's kind of an interesting trend. The company investing in that seems to be paying off. And management's also talked about, hey, we're going to launch a couple new businesses ideas every single year.

3:43This is throwing spaghetti at the wall for sure. but it has extra cash on hand, so it can't afford to invest in these new ideas. You look at the whole thing, it trades at 18 times its free cash flow. That's a valuation I can get behind. It's buying back shares and the share count is coming down. And it's investing in new opportunities. And here's the thing, its competitive position does afford investors the luxury of patience. If it was being outcompeted, if it was burning cash, you wouldn't have the ability to be very patient here. But because it is so strong, you can be patient while it waits for some of these new ideas to work out.

4:18John, I'm a little less convinced that optionality is going to lead to that next leg of growth. But the core business is a wonderful business. And you mentioned the valuation and that says that other investors don't necessarily think it's a wonderful business. So maybe some margin of safety there, plus, or maybe interest rates falling a catalyst for the business moving forward too? We'll find out about that. But Dan, you say there's something else that stands out to you. Yeah, there's a couple of things. One is that co-founder CEO Brian Chesky has done a great strategy where he is actually living in a different Airbnb property.

4:54It's like on a weekly basis or every couple of weeks, something like that. As I get older, as I start to travel more, I'm finding that is more appealing an idea for me as well. And I think that that may actually resonate with some older travelers as they get to a point where they're thinking about retirement, have more time to spend on the road. Just suddenly that hotel mindset, it's just different from what you get from an Airbnb. And so I think there's a lot of potential there. The other thing that I have run into in my own travels in the past year is that Airbnb is actually starting to get some cross listings from traditional hotels.

5:30And what I was shocked at is the pricing on the hotel rooms on Airbnb is sometimes cheaper than what you get from aggregator sites. I even ran into one situation where it happened to be a Marriott property. I'm a Marriott Bonvoy loyalty member. It was a better price on Airbnb than I could get as a loyalty member, which kind of ticked me off as a loyalty member, but it does speak to the appeal that hotel owners have when they're trying to get as much money as they possibly can. Maxing it out, putting it on all platforms is the smart thing to do. I just never expected a traditional hotel to be so interested in Airbnb.

6:12I think that that's a potential growth driver as well. See, that's the kind of optionality that I think could be compelling. And it's a little bit of maybe Amazon's ad business on its own platform for inventory where there's a lot of competition for consumer goods. And it's the same way for Airbnb. And it also says to me that Airbnb, you know what? We're not afraid of the hotel industry. Come give us some money. Put your properties on our platform. We'll take a little money from you. We're still going to win. Up next, Dan makes the case for Lululemon in the midst of growing competition and a change in the C-suite.

6:48Stay with us.

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7:23huge winner. It's up more than 15X since going public. But in recent years, it has not been a great investment. Investors have lost money from the peak back in 2023. We can go all the way back to 2020. Beginning of 2020, the stock is still down. The business has lost some of its luster. Dan, what's going on with Lululemon today that makes it compelling to you as a buy? Yeah, I've been following Lululemon for a long time. And it's interesting to me how stocks that arguably start out more looking like rule breakers can end up emulating hidden gem style stocks later on. You know, we all know Lululemon's yoga apparel business, it changed the retail industry.

8:05It opened up an entire new category of these so-called athleisure products. It kind of brought a new meaning to casual Fridays at the office. It's been instrumental. It's spawned a whole bunch of other specialty retail concepts as well. Business had done really well, but after briefly topping$500 a share late in 2023, early in 2024, we've seen the stock plunge 70%. Well, what happened? Growth trends slowed. They even reversed in the core North American market. And even now, the company is guarded about its immediate outlook. Seems like it's trying to bottom. But even most recent quarter, we saw same store sales in the North American segment drop.

8:48So there's a lot of questions about Lululemon right now. But the thing I focus on is we have seen Lululemon be resilient before. Turn back the clock, what, 10, 11 years or so. From around 2012 to 2014, the stock was down about 50%. What happened? And yoga pants were suddenly see-through. We had all these quality control issues. That was exacerbated by some comments from the then CEO, now former CEO and founder, which I won't bother to repeat here. But it took a while for the company to right the ship after that big boondoggle. But the payoff was the stock was a 10-bagger by 2021. So come back to today.

9:33Now we're facing a similarly interesting moment. Lululemon just announced its quarterly results earlier this month, but it also said CEO Calvin McDonald is stepping down. Shareholders were happy with that move. More recently, we've seen activist investors come in. Elliott Management has apparently taken a billion-dollar stake in Lululemon stock, has suggested a former Ralph Lauren executive named Jane Nielsen for the job. So very much the stock in play right now. A lot of investors trying to see, is this the thing that breaks Lululemon out of its slump? Yeah, it's so interesting, Dan, that we're going to experience a change here at CEO.

10:14And I'm a little bit worried about a new management team coming in here and overcorrecting because I really don't think things are as bad as it appears. I think you have good apparel businesses and bad ones. And bad ones have piling up inventory and that leads to markdowns and it leads to a complete disintegration of its profit margins. You look at Lululemon, that's not what's happening. It's a good business. Inventory is fine. Margins are fine. It's just having a slowdown. And so I'm worried that a new manager could come in here and overcorrect when in reality it's kind of stay the course and do what you need to do to keep appealing to your customers.

10:53I agree with a lot of what you said, John. And I will admit, I'm less than convinced that this recent trend of trying to pick up superstar CEOs for consumer goods companies that are going through some temporary problems. I just don't think that's as important as just going back to basics. Let's make some good products. Let's build up a core base of loyal customers, make them feel valued. But here's the thing. Investors have bid down Lululemon stocks so far that they're essentially assuming no real chance of successfully reigniting the growth fires here. I'm not that pessimistic. I think somebody new in the corner office might be able to reverse that negative sentiment and get the stock moving in the right direction again.

11:38I think competition is a real threat, but it's also an important reminder that it's a really compelling business. Competitors are not jumping in this to lose money. And we've seen other retailer, other apparel businesses that have struggled because they kind of lost control of distribution. Lululemon is different because it still has so much control over its distribution footprint. And I do think that I agree with both of you that this is less a turnaround and more of a recalibration, but the stock is still priced maybe for more trouble ahead. Yeah. Okay. Up next, we've got one more. I've got a Mag 7 stock that I think is more hidden gem than you might think.

12:14Stick with us. I'm Kyle Wood, host of Fun Facts Daily. We all know the Winter Olympics have thrilling competitions, but the history of the sports is more odd and interesting than you might realize. Like archaeologists have found skis that are over 8 ,000 years old, meaning that people in Russia and Scandinavia were skiing before the Great Pyramids were built in Egypt. Fun Facts Daily is covering all the stuff you never realized you always wanted to know about the Winter Olympics and hundreds of other topics. So follow Fun Facts Daily wherever you get your podcasts. Welcome back to Motley Fool Money.

12:47To wrap up today's show, I want to talk about Alphabet, guys. But what are we talking about here? I thought you said this was a hidden gem, right? Alphabet, more like hiding in plain sight. Hidden, this was April, maybe, but now? Yeah, I think that's fair. From the beginning of the year, the stock's up 55%, but that big sell-off during the lows in April. The stock's basically doubled since then. And it's clearly gone from being perceived as a feared loser from AI eroding that ad-driven search business to now one of the expected winners from artificial intelligence. Now, I think it's true. We're seeing it's getting really serious traction with Gemini.

13:31Its cloud services business is booming. And we've also figured out that the ad business, it's actually holding up pretty well, even as we do see search be affected by AI. But I think the reason it makes the cut for me and of the stocks that we've discussed today, it's the one that I have actually most recently bought. It's because of those things and all of the other things that Alphabet is positioned to win from. Yes, that includes search, that includes AI in the cloud, but it's basically got a Netflix bolted onto it with YouTube. And it's a cool little thing with YouTube is it's a much lower risk content development engine because it shares in the profits with content creators.

14:12By the way, it's emerged as one of the largest cable TV companies in the US too with YouTube TV. And we also, we continue to kind of creep closer to autonomous vehicles becoming a real thing. Waymo is approaching a half a million rides a week, and they're aiming to hit a million rides a week really soon. Eventually, that's going to be a big business. It's going to feel like an overnight success, but it will have actually taken 15 to 20 years to build out. Well, I think that's exactly why Alphabet is a hidden gem. It's not because it's undiscovered, but rather because investors tend to think about it one-dimensionally, when in reality, as you point out, Jason, this business can win every way from Thursday in so many different ways.

14:57As an analyst, I can barely keep up with everything that it is doing and succeeding in. So, optionality is a business trait that we can't measure by any valuation metric. There isn't a stock screener that's going to pull this out, but it's so important from an investing perspective. And just looking at the plethora of past stock market winners, they had that trait, and Alphabet certainly has it, and there are underappreciated optionality aspects of the business. Jason, kudos to you for making this purchase recently. I think it's always hard when you've seen a stock really take off before you've had a chance to really add to your position.

15:34I was fortunate enough. I saw Alphabet as sort of this mispriced, underappreciated stock years ago. And I've been adding, even as many commentators dismiss the company for missing out on AI, missing out on cloud computing. Well, Alphabet proved that wrong. And now the stock is much more fairly valued than it used to be. There's still potential, though, for future gains. Good on you, Jason. All right, guys, I got one last question to wrap this up. We've talked about three stocks today. Which do you think is the biggest winner in five years? John, you go first. Yeah, I hate to say it. Y 'all know how much I love Airbnb, but I believe that Lululemon has the clearest path to doubling in value over the next five years.

16:19I think all three of these stocks are really safe. I really do. But Lululemon, to me, it has a really good balance between its growth rate and its valuation. Maybe the most favorable balance between those two factors. And so, for me, it has the nod of the best stock today. Jason, I've got to say, I agree with John 100%, and not just because it was my pick. But I have to say this, too. I wish that it would be Alphabet. I wish that Alphabet would be able to outperform Lululemon over the next five years. Because I own a lot more Alphabet stock. I think Alphabet is going to do just fine. And I'm really optimistic and hopeful Airbnb might finally catch a break here, start executing well enough, get some appreciation from shareholders, get the stock moving back in the right direction.

17:06Yeah, Airbnb just keeps landing on my too hard pile. The valuation is really compelling. I'm waiting to see more evidence that these other things are going to really help it deliver, and we're going to be rewarded with a higher multiple. Alphabet, this is just about the most expensive multiple on a sales basis it's ever traded for. So it's not cheap. So there's still all the other things I laid out, we're counting on. The market is expecting big things from the company. So I agree. I come back to thinking of this group, the highest probability. I agree. I think the best margin of safety, the business that's proven, the business that's a lot stronger than the stock is treating it like, I think that's Lululemon too.

17:45I agree. How about that? All three of us. It's a first, Jason. I'm not sure that's ever happened before. Yeah, it's either a really good thing or a really bad thing, right, John? This is a shocking development for sure. Okay, guys, this has been a lot of fun. Dan, John, thank you both so much for joining me today. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers.

18:17Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For John Quast, Dan Kaufflinger, and the entire Motley Fool Money team, I'm Jason Hall. We'll see you tomorrow.