1 Stock I'm Putting on My Watchlist

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With the stock market tumbling over the past few months, the universe of stocks that I'm interested in buying has greatly expanded. Almost everything seemed expensive not too long ago, but that's no longer the case.

One stock in particular that I'm eying is Fitbit (NYSE: FIT). The fitness wearables company has had a rough few years, and 2018 has been no picnic for investors. But the market may be pricing in a bit too much pessimism.

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Trackers and smartwatches

Shares of Fitbit are down more than 90% from their all-time high. Slumping demand for the company's fitness trackers has led sales to tumble -- Fitbit expects revenue of $1.5 billion this year, down from nearly $2.2 billion in 2016. This sales plunge, coupled with heavy spending, pushed Fitbit's bottom line deep into the red over the past couple of years.

But there are a few things to like about Fitbit. First, the company's attempts to break into the smartwatch market look like a success. Fitbit's first smartwatch, the expensive Ionic, was a dud. But its second smartwatch, the affordable Versa, has been a big hit. The Versa goes for $199, just $50 more than the company's flagship Charge 3 fitness tracker, and far less than the newest Apple Watch. That aggressive pricing should help Fitbit convince some of its fitness tracker user base to upgrade.

Speaking of fitness trackers, Fitbit's tracker business could get a boost from the Charge 3. While the second-generation Charge tracker brought little new to the table, the Charge 3 is a different story. The device features an enlarged OLED screen, water resistance up to 50 meters, and a SpO2 sensor that can estimate changes in blood oxygen levels.

The Charge 3 also comes with a software upgrade and support for some third-party apps. It's not as full-featured as a smartwatch, but it can do a lot more than Fitbit's older devices. And the $150 price is unchanged, making it a compelling upgrade option for users not interested in the more capable Versa.

Lastly, Fitbit's balance sheet is rock-solid. The company is still posting losses, but its hoard of cash gives it plenty of time to turn things around. Fitbit had $623 million of cash and no debt at the end of the third quarter. That cash accounts for roughly half of the company's market capitalization.

Still a tough road ahead

It's important to not be overly optimistic here. Fitbit's smartwatch business carries lower margins than its tracker business, and competition is intense. I doubt the good old days of 20%-plus operating margins will ever return. But with the company valued at just $525 million after backing out the cash on the balance sheet, Fitbit doesn't need huge margins. A return to sustainable profitability should be all it takes to send the stock into recovery mode.

Fitbit's turnaround is very much a work in progress, and it could still be derailed. But with a valuation that already bakes in so much pessimism, betting on Fitbit is starting to look tempting. The stock is on my watchlist, and I'll be a buyer if it keeps heading lower.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAPL and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.