It can be both frustrating and delightful to watch a stock that you love continue to climb. One one hand, if you own shares already, you're participating in that stock's gains as you watch the value of your investment grow. On the other hand, it means that any shares you purchase going forward will need to be at that higher price -- unless, of course, the stock pulls back and gives you another chance to buy at a discount.
To that end, we asked three top Motley Fool investors to each pick a stock they would consider buying on a pullback. Read on to learn why they chose Alphabet (GOOG +0.30%)(GOOGL +0.25%), Alibaba (BABA +3.18%), and Costco Wholesale (COST 0.79%).
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This tech juggernaut can't be beaten
Steve Symington (Alphabet): I would have happily pitched the opportunity to buy Alphabet stock on any pullback in recent weeks. But as luck would have it, opportunistic investors have been presented with just such a chance following the Google parent's second-quarter 2017 report last week. More specifically, Alphabet stock has dropped 5% since then despite the fact it exceeded Wall Street's expectations on both revenue (up 21% year over year to $26.01 billion) and earnings (down 28% to $3.524 billion, or $5.01 per share).
To be fair, Alphabet's bottom line was held back by a massive $2.74 billion antitrust fine imposed against the company in late June by the European Commission (EC), which ruled that Google has unfairly boosted its own comparison-shopping service in search results over services by competitors. Alphabet, for its part, has promised to review the decision in detail as it considers its next steps and a potential appeal, but has insisted in the meantime that it disagrees with the EC's findings.
But it's simply incredible that Alphabet can easily absorb that fine in its entirety through a single quarter's income statements. For that, the company can thank the relative health of its core advertising business, where revenue climbed more than 18% last quarter to just under $22.7 billion, driven by a 52% increase in aggregate paid clicks on strong performances from both mobile search and YouTube. At the same time, it didn't stop Alphabet from continuing to invest in its unprofitable "Other Bets" segment, comprised mostly of high-potential businesses like Fiber high-speed internet, Nest connected home products, Verily life sciences products, and the Waymo self-driving vehicle initiative.
In short, not even a record-setting fine can put much of a dent in Alphabet's ironclad business. And even then, there's a chance it may not be on the hook if it can successfully plead its case. In the meantime, I think the recent pullback is a great chance for long-term investors to open or add to a position.
For Alibaba, the pullback is optional
Anders Bylund (Alibaba): There's no doubt in my mind that Alibaba's business is going places. At the same time, the stock chart might be a bumpy ride and you might be able to get a better deal on Alibaba shares by waiting for a steep price dip.
The China-based e-commerce specialist is enjoying fantastic growth right now. Sales are increasing by 51% year over year while earnings rose 83% in the latest quarterly report and free cash flows more than doubled. These are the growth rates of a young, hungry company that is earning a premium valuation the hard way.
On top of that, Alibaba's business footprint is massive. I mean, the company managed $550 billion of gross merchandise value in the last four quarters, and that makes it the biggest retailer in the world. This massive business scale plus huge growth equals an even larger growth premium.
But wait -- there's more.
Yes, China is a large and growing retail market, but the rest of the world is still many times greater. 90% of Alibaba's revenues were generated in China last year, and management is explicitly "laying the foundation for long-term growth" in international sales.
Alibaba is huge, is growing very fast, and is mapping out a next-level international growth strategy as we speak. Meanwhile, the stock is on sale for 26 times forward earnings. That's arguably expensive, unless you factor in the company's epic growth prospects. So yeah, feel free to wait for a dip before buying in -- the P/E ratio sure looks lofty.
But to each, their own. Trying to time the market is a dangerous game, and you're just as likely to miss out on big gains if Alibaba's stock simply marches upward from here. In the immortal words of Warren Buffett, "It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price."
In my view, buying Alibaba on a large share price pullback might actually be the brave thing to do here. The stock is very likely to serve you well even if you start from a rich valuation.
A great company at a not-so-great price
Tim Green (Costco): Shares of warehouse club Costco recently slumped following Amazon's bold entry into the brick-and-mortar grocery market with its proposed acquisition of Whole Foods Market. The stock is down about 16% from recent highs, with investors no doubt concerned that Amazon is set to become a larger threat.
I think that threat is overblown, given Costco's unmatched price advantage thanks to its membership model. But I also think the stock is too expensive even after the Amazon-induced pullback. Costco trades for around 25 times last year's earnings, a lofty multiple for a company that isn't growing very fast. In fiscal 2016, revenue rose by just 2.2%, while per-share earnings dropped slightly.
Costco is a great company, with a consistency that's almost unheard of in retail. It's also proven to be mostly Amazon-proof, giving it time to figure out its e-commerce strategy. But even the best company can be a bad investment if the price is too high. I think Costco falls into that category.
One pullback isn't enough to make Costco an attractive investment. The company's results have been stellar lately, with comparable sales up 6% in June, so the pessimism that drove the stock lower may not last long. But more Amazon-related news could send the stock lower again, and at a more reasonable valuation Costco is a stock to consider.
