A tech-driven stock-buying rally has sent the major market indexes to new highs this year, but the rally has been uneven, as some consumer brands work to manage a tough sales environment. Shares of several leading consumer goods brands now trade well off their previous highs.

In the hunt for stock bargains in an elevated market, it's not surprising to see the most successful fund managers scooping up stocks with real potential to eventually recover. For instance, Bill Ackman of Pershing Square Holdings and David Einhorn of Greenlight Capital added shares of Nike (NYSE: NKE) and Peloton Interactive (NASDAQ: PTON) to their firm's holdings in the second quarter.

Here's why these two bargain stocks could earn investors, including these two billionaires, a nice profit over the next few years.

1. Nike

Bill Ackman's Pershing Square delivered annualized returns of over 15% over the last 21 years. That more than outpaced the comparable 10% average annual return of the S&P 500. His firm's success has pushed Ackman's net worth to $9 billion, according to Forbes.

Ackman delivered those returns following a traditional value investing approach. His firm often holds a concentrated portfolio of eight to 12 stocks of industry-leading companies that generate consistent profits. He usually buys a new position in a company when it is experiencing near-term problems, because that often means the stock is on sale.

Nike certainly fits the bill. It's the largest athletic wear brand in the world, with $51 billion in annual revenue. Two-thirds of its revenue comes from footwear. Ackman took advantage of the recent downturn in Nike stock to start a position in the second quarter.

The swoosh reported flat sales in fiscal 2024 (which ended in May). Higher interest rates are squeezing consumer spending right now, which is impacting many retail companies, but Nike continues to remain a very profitable business. The company's net profit grew 12% last year to $5.7 billion.

The problem for Nike is that it made a big push into fashion-leaning lifestyle products in recent years that initially benefited its growth but is now hurting sales as consumer preferences shift.

To respond to the challenges, Nike is making changes to its leadership and investing more in performance products to drive more growth. Management is calling fiscal 2025 a transition year, with revenue expected to be down mid-single digits as it adjusts its strategy.

Nike will bounce back. The athletic apparel industry is projected to grow from $358 billion in 2023 to over $450 billion by 2028, according to Statista. This gives a dominant brand like Nike a huge tailwind.

The stock is down 53% from its previous high and selling at its lowest valuation in years. Its price-to-earnings (P/E) ratio of 22 is cheaper than the average company in the S&P 500 index that trades at a P/E of 27, but that discount is a bargain for an industry-leading brand that is capable of growing earnings at double-digit annual rates as it did over the last decade.

2. Peloton Interactive

David Einhorn made a name for himself after predicting the collapse of Lehman Brothers in 2008. Through 2023, Greenlight Capital earned annualized returns of 13%, beating the S&P 500's return of 9.5% since the firm's inception in 1996. Einhorn's net worth is estimated between $1.5 billion and $2.2 billion.

Einhorn has built a reputation as a savvy investor who conducts thorough research into a company's financial position, as the successful call on Lehman Brothers illustrated. When his firm buys shares of a beaten-down business trading well off its highs, it's worth paying attention.

Greenlight Capital added a new position in Peloton last quarter. The fitness brand has not been the same fast-growing business it was during the height of the pandemic when people were investing in at-home exercise equipment to stay active. The company's trailing-12-month revenue of $2.7 billion is way down from its peak of $4.1 billion in fiscal 2021.

The business is also struggling to turn a profit, with a net loss of $30 million in the recent quarter, which is why the stock is trading well off its highs.

However, it is encouraging that revenue is stabilizing during a year when consumers are being squeezed by inflation and higher interest rates. Peloton's most recent quarterly revenue was flat compared to the year-ago quarter.

Einhorn no doubt is focused on Peloton's balance sheet, where the company refinanced its debt in May, which extended its average maturities out to 2029. It ended the quarter with $1.5 billion in total debt compared to a cash position of $697 million, but it reduced that debt by $200 million so far this year. The refinancing buys Peloton more time to improve profitability.

The value in Peloton's business comes from its loyal customers and subscription-based business model. Members were down 2% year-over-year last quarter, but it still has nearly 3 million paid connected fitness subscriptions. The recurring revenue from these subscribers should allow the company to turn a profit as management gets equipment inventory in line with demand levels.

Consistent with his investing style, Einhorn is likely not making a long-term investment in the stock, but he clearly sees Peloton's share price trading below what he estimates it is worth.

The stock is selling at a price-to-sales ratio of 0.6, which is low and could lead to substantial upside if Peloton can improve its profitability. It's worth noting that the stock price jumped 39% the day it reported fiscal Q4 earnings results on Aug. 22, highlighting the value in the shares. If Peloton continues to make progress in strengthening the balance sheet, the stock could head even higher.

Should you invest $1,000 in Nike right now?

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike and Peloton Interactive. The Motley Fool has a disclosure policy.

2 Bargain Stocks Billionaires Are Buying was originally published by The Motley Fool