Growth stocks remain popular among investors for a reason. They have the potential to create massive wealth over time. For example, if you had invested $1,000 in Amazon back in May 2010, it would be worth a staggering $17,700 right now.
Due to their estimated growth metrics, such stocks tend to trade at a premium. But a high valuation makes these stocks vulnerable in a sell-off. In the case of a recession, they will not be able to sustain their growth rates, which will drag stock prices significantly lower.
In the last two and a half months, the coronavirus-led bear market has bulls running for the exit. Lower consumer spending and business shutdowns have sent shock waves across global economies. But any investor worth their salt will tell you that a bear market is a chance to buy quality companies at cheap valuations. Here we look at three such growth stocks that can move higher on a market rebound and crush markets for years to come.
Image source: Getty Images.
An apparel giant
The COVID-19 pandemic has decimated the retail sector. Bricks-and-mortar outlets have closed, driving shares of retail companies to multiyear lows. lululemon athletica (LULU -0.14%) stock touched a record high of $266.2 this year then fell to a 52-week low of $128.84 before gaining momentum in April to currently trade around $220. Despite the whirlwind movement, Lululemon stock is still up 23% in the last year.
Lululemon designs, distributes, and retails a portfolio of lifestyle-inspired athletic apparel and accessories under the lululemon brand.
In fiscal 2020, the company reported revenue of $4 billion, up 21% year over year. However, this growth rate is expected to decelerate significantly in 2020. According to data from Yahoo! Finance, analysts expect company sales to grow by 1.9% to $4.05 billion in 2020. Lululemon has had to close stores around the world since mid-March and did not provide any financial guidance for 2020.
The company's fundamentals remain strong. Sales and earnings have more than doubled in the last five years. The brand has a loyal customer base and has invested in technologies such as RFID (radio-frequency identification) to manage inventory levels and optimize the supply chain.
Lululemon products are not seasonal, which ensures steady demand throughout the year. Its mobile applications, e-commerce stores, and retail locations provide customers multiple ways to buy products. Lululemon has no long-term debt and ended fiscal 2019 with a cash balance of $1.09 billion, which will not pressurize financials at a time of lower-than-normal demand.
Lululemon stock went public back in July 2007. It has since returned 1,460% to shareholders.
A niche e-commerce player
While people are stuck at home, shopping online becomes more attractive than ever. Etsy (ETSY -1.04%) is an online marketplace that provides a unique platform for entrepreneurs to handmade goods. It has a wide roster of buyers and sellers around the world. In 2019, the company managed to increase gross merchandise sales (GMS) by 26.5% to $4.97 billion, up from its targeted growth between 16% and 20%.
The stock market rebounded last month. But Etsy stock easily crushed broader market returns and gained a whopping 69% in April. E-commerce companies will feel less of a pinch than in-person sellers from countrywide lockdowns.
While Etsy's GMS was up 41% in the first two months of 2020, it fell to 27% in March. Though growth decelerated, it is still robust enough to keep investors interested. In a fireside chat, company CEO Josh Silverman confirmed that the GMS in the first quarter stood at a healthy 32% despite volatility in demand.
Etsy's long-term prospects remain attractive. It estimates the total addressable market at $250 billion, giving the company enough opportunities to drive top-line growth given its 2019 sales figure of $818.4 million.
A key revenue driver for Etsy is the ability to increase the number of buyers on its platform, something it's done successfully over the years. Etsy's active buyers doubled from 22 million in 2015 to 46 million in 2019. It continues to spend heavily on marketing and customer acquisition to gain a loyal buyer base.
Another reason Etsy remains a top pick for growth investors is its untapped market opportunity in emerging markets of Asia and Latin America. Currently, international sales account for just 30% of revenue.
Etsy stock went public back in April 2015. It's since returned 164% to shareholders.
A Warren Buffett bet
Warren Buffett's Berkshire Hathaway has a 5.1% stake in Brazilian-based fintech company StoneCo (STNE -3.98%) -- 14.16 million shares worth $378.8 million. When the Oracle of Omaha buys a stake in a company, we like to watch it closely.
StoneCo stock started trading on the Nasdaq in October 2018. Its IPO price was $24, and the stock touched a record high of $46.69 this year. It then fell $17.72 and has since recovered to around $27 per share.
StoneCo provides end-to-end cloud-based financial technology solutions to small and medium-sized businesses (SMEs) including payment service providers. The company's Stone Hubs include a team of sales and support staff to engage local SMEs, which should drive customer engagement and retention higher over time.
Brazil is reportedly the fourth-largest payment market in the world, giving StoneCo enough opportunity to drive sales higher in the upcoming decade. Brazil has 170 million consumers and 8 million SMEs. Further, electronic payment penetration is expected to reach 43.5% in 2019, up from 32% in 2016.
StoneCo ended 2019 with an active customer base of 495,100 and total payment volume (TPV) of $8.9 billion. While customers rose 84%, the TPV was up 51% last year.
My verdict
Several growth stocks, such as Okta, Roku, and Twilio, are still posting an adjusted loss. However, StoneCo, Lululemon, and Etsy are profitable on a non-GAAP basis. Their valuations, though, might concern investors.
LULU PE Ratio (Forward) data by YCharts.
Lululemon has a forward price-to-sales multiple of 7. This figure stands at 13.6 for StoneCo and 8.8 for Etsy. Comparatively, Lululemon has a forward price-to-earnings multiple of 48.8, while it stands at 48.4 for StoneCo and 111.5 for Etsy.
While the near-term concerns of the COVID-19 pandemic might weigh on these stocks, their expanding addressable markets and stellar estimated growth prospects make them a winning bet for growth investors.
