A stock market correction is defined as a drop of 10% or more. As of this writing, the S&P 500 is down 17% from its peak while the Nasdaq Composite the index is down 27% from its previous high, technically trading in bear market territory.
A drop of more than 20% occurs every five to 10 years. It never feels right in the moment (you probably don’t need me to tell you that). But these setbacks have always proven to be opportune times for great long-term investment opportunities.
When the stock market drops around 20%, I become more aggressive in my purchases. But I’m not just looking for what’s below. I look for the best deals involving buy-and-hold opportunities. and shoemaker crocodiles (CROX 6.51%)ad technology company PubMatic (PUBM) 16.42%)fintech pioneer PayPal Holdings (PYPL 5.42%)and the Latin American titan of digital commerce free market (MELI 10.38%) are four of the biggest no-brainers I see right now.
1. Crocs: The biggest no-brainer on the market
Crocs is the most recent stock I bought for my portfolio. I bought it because it is the biggest no-brainer I see.
First quarter 2022 revenue for the Crocs brand increased 18.5% year over year to $542 million. However, the company recently acquired another company called Hey Dude, which it owned for part of the quarter and which added about $115 million in additional revenue.
Between the two brands, Crocs expects to generate revenue of $3.5 billion by 2022, up more than 50% from 2021. Some of this revenue comes from the $2.5 billion acquisition of Hey Dude, so take the overall growth rate with a grain of salt. of salt. But it’s still waiting organic a growth of more than 20%, not insignificant.
Plus, Crocs doesn’t just generate shoe sales, it does so at an enviable profit margin. The company has earned around $700 million in net income for the last 12 months. And it expects at least $910 million in adjusted operating income this year.
Crocs shares have fallen 70% in recent months and now have a market capitalization of just $3.4 billion. In other words, Crocs is profitable, its revenue is up more than 50%, and it’s trading at less than four times this year’s adjusted operating income. You’ll be hard-pressed to find a more compelling mix of growth and value than Crocs stock right now.
2. PubMatic: Cheaper than average stock
PubMatic is a small ad tech company that partners with publishers (primarily video) to sell their ad space. And it’s a good deal to be in, considering he’s 23.7% net profit margin in the last 12 months. It has generated $56.5 million in net income over the past 12 months, which means the stock is trading at just 19 times ending earnings, which is cheaper than the stock market average, as the chart below shows.
PubMatic trades at a below average valuation, but has above average prospects. While many companies are dealing with the highest rate of inflation in 40 years, PubMatic is seeing improvements in its cost structure over time. In the first quarter of 2020, it served 31 billion ad impressions at a cost of $1.21 per million. In the first quarter of 2022, it more than tripled its ad impressions, but its cost per million fell by more than 50%.
In the years to come, I hope that PubMatic will continue to increase ads on its platform. Consider the powerful secular trend at work here. According to ResearchandMarkets.com, the global digital advertising and marketing market was $350 billion in 2020. By 2026, it is expected to reach $786 billion.
PubMatic expects to grow its full-year revenue by about 25% in 2022, faster than the industry growth rate that Research and Markets predicts. As mentioned, the company is profitable. And he has about $175 million in cash, cash equivalents and marketable securities, and zero debt.
Investing legend Peter Lynch once joked, “It’s very hard to go bankrupt if you don’t have any debt.” PubMatic shares may be down more than 70% from their all-time high. But it is a profitable and growing business with no debt, which means the company is not in danger of going under.
3. PayPal: If you missed the boat before, get on board now
PayPal went public in 2015 at around $37 per share. By the end of 2021, the stock was up more than 400% during its 5 1/2 years as an independent public company, completely outperforming the S&P 500’s 130% return. Certainly, some investors felt they had missed the boat.
However, PayPal shares are now down 60% so far this year and are barely above the market average over its lifetime. So if you felt like you missed the boat earlier, get on board. The price per share is lower now than it was in March 2020 when the market crashed due to the start of the pandemic.
To me, the most surprising thing about PayPal’s decline is its current valuation. It is trading at one of the cheapest price-to-free cash flow valuations it has ever traded at. And from a price-to-sales (P/S) perspective, it’s never been cheaper, as the chart below shows.
To be fair, PayPal is struggling a bit at the moment. It has 429 million active accounts and that scale means it’s hard to win over incremental users: New accounts in the first quarter of 2022 were only up 1% from the previous quarter. Because of this, management only expects total payment volume to grow 13-15% in 2022 compared to 2021, which is historically slow for this company.
That said, PayPal still generates more than $1 billion in quarterly free cash flow, money that management can use to acquire other companies or reward shareholders. For example, it bought back 11 million shares in the first quarter alone, roughly 1% of total shares. But with the price currently depressed, management could opportunistically buy back shares.
4. MercadoLibre: For investors seeking competitive advantages
Finally, you don’t need to think too hard about buying MercadoLibre shares at their current price. The future reward far exceeds the price the market asks investors to pay. It is down 60% from its all-time high at the time of writing. But while that drop is huge, it’s still a market-beating stock, up more than 2,600% since going public some 15 years ago.
If you wanted to buy MercadoLibre shares at a P/S valuation of less than five, there are only two times in history when you could have bought them: during the Great Recession and right now. That’s right, MercadoLibre shares haven’t been this cheap in over a decade.
When companies struggle, they trade fairly at depressed valuations. But MercadoLibre’s recent quarterly financial results do not represent a dying business. By contrast, first quarter 2022 revenue was up 63% year-over-year, active accounts were up 15%, and gross merchandise volume when adjusted for currency fluctuations (the value of items sold in your marketplace) increased almost 32%. .
However, the crown jewel of MercadoLibre’s Q1 report was its fintech arm, Mercado Pago. Total payment volume on Mercado Pago increased 81% year over year, topping $25 billion. Importantly, 68% of this payment volume occurred off of MercoLibre’s own electronic commerce portal. This means that Mercado Pago is gaining wide adoption, regardless of future market adoption of MercadoLibre.
Market corrections create fear in investors. Because of this, I can understand if you’re not just looking for a good deal. You also likely want a company with a lasting competitive advantage: a moat. MercadoLibre also has this, in my opinion, with Mercado Envios.
Mercado Envios is MercadoLibre’s shipping logistics network. Historically, in the Latin American markets where it operates, shipping has been difficult. However, through years of building its infrastructure, MercadoLibre is in a position of profound strength. It has been an expensive undertaking. But as of the first quarter, 79% of their merchandise volume can be delivered in 48 hours or less. I don’t think any competitor can match this service on this scale. So for people who want their stuff fast (and who doesn’t?), MercadoLibre is well positioned for the future.
the final warning
When I say that Crocs, PubMatic, PayPal and MercadoLibre are obvious buys, I’m not saying these stocks can’t fall further than they already have, in fact they can. If you’re looking for guaranteed positive returns in the next year or two, the stock market is not the place to find it.
I call these four stocks obvious buys because of their great potential to create shareholder value from here. Value creation is a time-consuming process. It may take three, four or five years before shareholders recognize above-market returns. But for those willing to show this level of patience, I think these four stocks offer exceptional value right now.