3 Growth Stocks That Will Soar in the Next Bull Market

Nobody knows exactly when the next bull market will start, but we do know one thing: there will be another bull market at some point.

For more than a century, the S&P500 has weathered world wars, depressions, terrorist attacks, and pandemics, and has averaged a 9% annual return with dividends reinvested. Although there have been several bear markets during this period, none of them have derailed the US stock market from its growth trajectory. Since the average duration of a bear market is only about nine months, the current one, which began in early January when the S&P 500 peaked, has already lasted about as long as a typical bear market.

However, that is no guarantee that the market is close to bottoming out. In fact, Federal Reserve Chair Jerome Powell has just warned of future rate hikes, a warning likely to weigh on stock prices. But inflation will eventually cool down and the economy will normalize.

If that’s the case, here are three stocks that seem poised to win in the next bull market.

1. Amazon: upswing in e-commerce

Amazon (AMZN -3.01%) was one of the best-performing stocks of the last generation, but recently the company’s returns have been less than impressive. Year to date, the stock is down 30%, and it’s nearly 40% off its peak last year.

Amazon shares fell on valuation concerns, along with a slowdown in sales growth and losses in its e-commerce division.

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In fact, its second-quarter revenue grew just 7% to $121.2 million, but the good news for investors is that revenue growth is expected to accelerate in the coming quarters. Management was calling for revenue growth of 13% to 17% in the third quarter, and from here comparisons become easier as e-commerce growth began to falter in the second half of last year as the economy reopened.

Finally, Amazon’s cloud computing arm, Amazon Web Services (AWS), continues to experience strong growth and appears to be the source of most of the company’s value right now. In the second quarter, AWS delivered revenue growth of 33% to $19.7 billion with an operating margin of 29%.

When inflation cools and the next bull market begins, Amazon’s e-commerce division will likely grow faster than it is today. AWS is only getting bigger, and investors will be willing to assign a higher multiple to growth stocks like Amazon. It looks like a good bet to be a winner.

2. PayPal: Leading the war on cash

like amazon, PayPal (PYPL -0.79%) was a big winner during the pandemic as consumer spending shifted online in channels like e-commerce.

More recently, however, the company’s growth has slowed as it faces difficult comparisons, causing the stock to take a hit. Shares are down 54% year-to-date and more than 70% off their peak last year; Investors fear the impact of a recession and worry that PayPal’s sluggish growth rate could become the new normal.

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Second-quarter results were also disappointing, as revenue rose just 9% to $6.8 billion. However, CEO Dan Schulman said he expects the second quarter to mark the bottom of the company’s performance.

For the third quarter, PayPal is on track to meet its guidance of 10% revenue growth, or 12% exclusive eBay (after the end of a long-term agreement between the companies). PayPal is also launching a cost-cutting plan to spur earnings growth and save $900 million this year and $1.3 billion next year, in part by reducing its real estate footprint and moving hiring to lower-cost regions.

As a payments stock, PayPal is also cyclical; its business and stock price should bounce back in the next bull market, just like most cyclical stocks. PayPal is now valued like an average stock, with a price-to-earnings (P/E) ratio of just 22 based on this year’s expected earnings per share, which is only marginally more expensive than the S&P 500.

However, PayPal still has ample growth opportunities, and its earnings multiple should rise once investor confidence in the market returns.

3. Carvana: The disruptive online car dealership

Few stocks have been as volatile as Carvana (CVNA -2.85%), the fast-growing online used car dealership. The stock soared more than 1,000% during the pandemic before shedding more than 90% of those gains. The market seemed to be betting that slowing growth, sky-high used-car prices, and an unprofitable business model would drive the company into bankruptcy.

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Car buying is a cyclical business, and Carvana is certainly sensitive to the macroeconomic climate, but it could also benefit to some extent from rising interest rates.

Runaway inflation in the used car market has pushed prices to record highs, and a normalization in that market would make it easier for Carvana to accurately price the cars it buys and sells. While rising interest rates are expected to cool demand for used cars, they also create opportunities for Carvana to make more money from its financing products.

To reassure investors that it can weather the bear market, the company laid off 12% of its employees in May, which will help reduce overhead and meet its long-term goal of 6% in SG&A. to 8% of total sales. Carvana stock will likely struggle as long as the bear market continues, as it faces a number of risks in the event of a recession, but these appear to be priced in as the stock trades at a price-to-sales multiple of just 0.17 .

If the company weathers the next few quarters, the upside potential in the next bull market could be huge since Carvana is the leading brand in the fast-growing online used car market. It needs to reaccelerate revenue growth and keep an eye on costs, but if it does, another multibagging surge wouldn’t come as a surprise.

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