Investors are getting nervous. After a months-long period of calm, stocks have tumbled for two straight days with little warning. Wednesday's declines sent the S&P 500 down 3.3%, while the Dow Jones Industrial Average lost 3.2% and the tech-heavy Nasdaq fell 4.1%.
It was the worst single-day performance for the market since the sell-off in February, and it sparked renewed concerns about an extended pullback in stocks after a bull market that's lasted more than nine years.
Though a market pullback can rattle the nerves of market-watchers, Foolish investors know that sell-offs can be the best times to add to your holdings. With that in mind, keep reading to see why I'm eyeing Amazon (AMZN -1.64%), JD.com (JD 2.61%), and Facebook (META -0.52%) in the event of a market correction, or even a bear market.
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An unmatched network of competitive advantages
Amazon investors were celebrating just weeks ago as the e-commerce giant crossed two big milestones. The stock topped $2,000 per share, and its market cap surpassed $1 trillion, making it the second U.S. company to achieve that feat, shortly after Apple did it this summer. However, Amazon stock has already pulled back significantly since then as the stock is down 16% from its all-time high at the time of writing.
Though Amazon carries a steep valuation, there are a number of reasons why the stock looks like a smart buy on a discount. First, Amazon is looking stronger than ever as the company has built a network of businesses that reinforce each other, creating unmatched competitive advantages. Building off of its giant e-commerce enterprise, the company has layered on more profitable businesses like third-party seller services such as its marketplace and fulfillment. Its advertising business is growing quickly, and it's locked customers in with its popular Prime loyalty program. Its cloud-computing division, Amazon Web Services, continues to grow at an impressive rate, and the company is always experimenting and unveiling new technology, like the cashier-less Amazon Go store, which could expand to as many as 3,000 locations in just a few years.
As a result, profits at the company are finally surging. Through the first half of the year, diluted earnings per share jumped from $1.87 to $8.34, and that pattern is expected to continue through the current quarter as Amazon expects operating income of $1.4 billion to $2.4 billion, up from $347 million a year ago. By the end of the year, Amazon's P/E ratio could be under 100 for the first time ever.
Finally, the company is well-positioned for a recession as customers perceive it to be a low-priced or competitively priced option, and it regularly ranks near the top in customer satisfaction surveys, indicating that customers are likely to remain loyal to it.
A cheap Chinese Amazon
If you're waiting for a bear market to buy shares of JD.com, I have good news for you. Chinese stocks are already in one as the Shanghai Composite has dropped more than 20% from its peak in January on concerns about trade war tensions and a weakening economy.
JD's recent performance has been even worse as the stock is down more than 50% since its peak early this year. Weak profits at China's No. 2 e-commerce company sank the stock earlier as JD has missed earnings estimates in its last three quarters, and then shares took a dive in the beginning of September after a bizarre incident in which CEO Richard Liu was arrested on rape charges in Minnesota. Liu was released the next morning and allowed to return to China, which seemed to indicate he was no longer a suspect, though the case remains open.
JD is still reeling from the headline -- as well as the recognition of the risk of potentially losing Liu as CEO -- as the stock is stuck near an all-time low. That looks like a mistake given the company's current growth and long-term potential. Revenue jumped 41% in its most recent quarter, for example, and with the stock pullback, JD seems to resemble Amazon in 2014 as the company is investing heavily in new warehouses and technologies like drone delivery, which have helped it speed up delivery and gain market share from Alibaba, the e-commerce leader in China. However, the market has failed to reward JD for those investments. Based on the analyst forecast of $0.82 in earnings per share next year, the stock trades at a P/E of just 28, which seems excessively cheap for a Chinese growth stock like this.
2 billion users can't all be wrong
Like JD, Facebook (META -0.52%) has also suffered from bad headlines this year. From the Cambridge Analytica scandal to CEO Mark Zuckerberg's testimony before Congress, a warning about profit margins, and the recent data breach of 50 million accounts, it's certainly been a forgettable year for the leading social network. Not surprisingly, the stock is down 30% from its all-time high earlier this year, but despite the negative investor sentiment, there are still plenty of strengths in Facebook.
With more than 2 billion active users, Facebook is arguably more entrenched than any business in the history of the world as the network effects stemming from that giant user base solidify the company's social supremacy. Those competitive advantages have led to outstanding growth and profit margins as revenue jumped 42%, and it posted an operating margin of 49% over the last four quarters, meaning the company keeps half of its revenue before taxes. Facebook shares crashed when management warned that that figure would fall to the mid-30s next year, but that would still be a better operating margin than almost any other stock on the market.
Plus, Facebook still has plenty of growth opportunities like entering the developing world, investing further in Instagram, monetizing new products like Stories, and growing WhatsApp and Oculus, which remain largely untapped. At a P/E of just 23, it seems like the risks above have been priced in and then some, especially as the company can leverage its $43 billion cash hoard to buy back shares and further lift EPS. Facebook is trading like a value stock, but it's still got plenty of growth ahead of it. Like Amazon, the company's business is also well-suited for a recession as users will spend time on its platforms no matter what the economy is doing.
No one knows when the market will crash, and if it does, how long or steep the sell-off will be. But with stocks already looking vulnerable to correction, it's a good time to prepare a watchlist of potential buys. Amazon, JD, and Facebook look like a good start to me.
