With the bulls running for the exits as the markets sink into a bear market, some growth stocks are selling at tempting valuations right now. No one knows how long this bear market will last. It could last for months, or the markets could snap back in a matter of weeks. If anyone on TV tries to tell you what's going to happen, go watch The Mandalorian on Disney+ instead.
What history tells us is that bear markets are the best time to put money to work. The negativity drives valuations down well below what companies are really worth, which lays the foundation for the next bull market. The stocks investors should be buying now are the ones with strong balance sheets and enormous runways for growth.
Lululemon: A future athletic apparel giant
Brick-and-mortar retailers are suffering in this environment, but this is a great opportunity to buy some of the strongest athletic apparel brands at big discounts. The athletic apparel industry has been a bright spot over the last decade in the fickle retail industry, and that trend will likely resume when the economy bounces back.
Lululemon is a rising juggernaut in this space. Sales and earnings have exploded in recent years, as the company continues to expand both domestically and internationally.
Lululemon recently joined other retail stores in announcing that all stores in North America and Europe will be closed until March 27 to help curtail the spread of the virus, although customers will still be able to shop on its website.
The store closures will put a dent in sales in the short term, but the recent numbers reveal a business with strong underlying momentum.
Sales and earnings have more than doubled over the last five years, and management continues to find ways to improve margins and build brand awareness around the world. China and Europe have been very strong markets for the company. In the last quarter, Lululemon reported international growth of 35% year over year.
The stock is as cheap as it's been in a while. Although near-term earnings will likely take a hit, Lululemon's trailing price-to-earnings ratio has been cut in half to 31.6 times earnings, which puts the shares toward the lower end of its trading range over the last 10 years.
Most importantly, Lululemon has $586 million in cash on the balance sheet and zero debt. It will survive a recession and continue growing for years to come.
Amazon: This winner should keep on winning
Consumer staples stocks have outperformed during the recent market sell-off, and since Amazon sells its fair share of everyday essentials through its website and Whole Foods Market, the stock has held up relatively well. Year to date, Amazon is only down slightly, while the S&P 500 has fallen more than 25%, as of March 18.
More people are staying home, and that has led to good business for Prime delivery with Whole Foods Market. This is an awful situation to boast of sales increases, but it's very likely that Amazon will see a boost in new people signing up for Prime in the short term. Amazon is planning to hire 100,000 additional workers in the U.S. to meet the surge in demand for online deliveries due to the coronavirus outbreak.
Amazon has been a big winner for investors since its IPO more than 20 years ago. The stock's outperformance so far in this downturn just means the shares should rebound strongly when the virus stops spreading.
While the core retail business is still posting high double-digit growth in sales, some analysts believe Amazon is undervalued due to the robust growth in its cloud offering, Amazon Web Services, which makes up two-thirds of the company's operating income.
All in all, Amazon is a cash fortress that can survive a recession and remain a great growth stock for investors over the long term. The company generated $38.5 billion in cash from operations in 2019 and ended the year with $31.6 billion of net cash in the bank. The most impressive thing about those numbers is that cash from operations has more than doubled over the last two years, thanks to the explosive growth of AWS.
Stitch Fix: An overlooked growth opportunity in retail
Stitch Fix is a growing online retail brand that is riding the emergence of the subscription economy. However, it's not really a subscription service. Its 3.5 million clients can queue their Fix shipments how often they like, which is one reason why Stitch Fix has been successful.
The problem for many shoppers is that there are too many apparel brands, which makes shopping sometimes feel overwhelming and time-consuming. The value proposition for Stitch Fix is that it can learn your tastes better than you can, and therefore, remove the hassle of shopping for new clothes.
The company is continuing to get smarter at learning clients' tastes as it collects more data and feedback, and this is opening more growth opportunities. Management is using the gross profits from its core women's category to invest in a direct buy offering (Shop Your Looks), where Stitch Fix recommends specific items that clients can buy directly from the company. This should drive repeat sales and help the business improve profitability.
The stock got clobbered over the last month, as management offered a soft near-term forecast in early February. While revenue increased 22% year over year in the last quarter, management now expects revenue to decelerate to the mid-teens. For that, they blamed a high promotional environment in the retail industry.
Still, the sell-off has taken the stock down to a total market value of less than $1.5 billion. That just looks too low based on the company's growth and the opportunity to capture more market share in the $1.5 trillion global apparel industry.
It's also recession-proof. Stitch Fix has $300 million of cash and short-term investments and no debt.
Even better, this is a founder-led business, with CEO Katrina Lake owning a significant percentage of the shares outstanding -- a telling sign that she wants to see the stock rise just as shareholders do. The company has all the ingredients of becoming a big winner in the retail industry over the long term.