As an investor, you've witnessed record levels of volatility over the past three months. Although we've bounced quite a bit off of the March 23 lows, it doesn't mask the fact that uncertainties tied to the coronavirus disease 2019 (COVID-19) pandemic pushed the benchmark S&P 500 down 34% in just 33 calendar days.
But history has shown that even the grimmest outlooks offer light at the end of the tunnel. Despite 37 previous corrections of at least 10% in the S&P 500 since the beginning of 1950, every single one was eventually put into the rearview mirror by a bull market rally. We may not know when this bear market will end or if we've even bottomed out yet, but history tells us that opportunistic long-term investors who buy great stocks during sizable moves lower in the market tend to do quite well.
The question is, what to buy?
Here's why growth stocks should be on your buy list
According to a Bank of America/Merrill Lynch report released in 2016, value stocks would be the seemingly logical choice. After all, value stocks averaged an annual gain of 17% for the 90-year period between 1926 and 2015. That compared to an annual average gain of 12.6% for growth stocks over the same period.
However, the variables that fueled value stocks to such incredible gains have drastically changed. For example, over the past decade we've witnessed the Federal Reserve keep the federal funds rate at or near historic lows. This has made borrowing money an inexpensive practice for fast-growing businesses. With the COVID-19 pandemic unlikely to ease the economic malaise anytime soon, you can expect the nation's central bank to keep its fed funds rate at an historic low for a long time to come. That favors growth stocks, not value stocks.
Furthermore, retail investors' access to information has changed substantially over the past couple of decades. Prior to the mid-1990s, they'd have to rely on a broker to execute their trades, and had little in the way of financial information to pore over. Today, income statements and balance sheets are a click of a button away. With the playing field leveled, it's become easier than ever to buy companies with aggressive growth prospects, rather than stodgier names with a low price-to-earnings multiple.
Best of all, most brokerages have stopped charging commissions for buying and selling activity on major U.S. exchanges. This makes it easier than ever for retail investors to put their money to work.
If you have, say, $2,500 at the ready that you won't need to pay bills or cover an emergency should one arise, then consider buying these top growth stocks right now.
Just because a company is a megacap (i.e., has a market cap over $100 billion) doesn't mean it's incapable of rapid growth. Social media giant Facebook (NASDAQ:FB) is perhaps the perfect example of this.
Facebook has recently taken a lot of heat for its "slowing" growth, with a 25% sales increase reported in the fourth quarter and 17% revenue growth in the first quarter. Both figures represent Facebook's weakest sales growth as a public company.
But think about this for a moment: Facebook has monetized Instagram and its Facebook platform via advertising, but has hardly scratched the monetization surface when it comes to Facebook Messenger and WhatsApp. That's four of the seven most-visited social platforms in the world, of which two aren't even generating sizable revenue yet for Facebook. This would suggest that Facebook's double-digit sales growth runway is going to be a lot longer than most folks realize once these platforms are finally monetized.
What's more, it's not as if advertisers have better options. Sure, there are plenty of social media platforms to reach consumers, but none is going to offer access to 2.6 billion monthly active users (MAUs) like Facebook, or nearly 3 billion unique MAUs if you include Instagram and WhatsApp. Advertisers are willing to pay up for this access, which bodes well for Facebook.
As one last bonus, Facebook is historically inexpensive relative to its future cash flow potential. That makes it a no-brainer growth stock to buy.
Palo Alto Networks
Once again, don't be afraid of big names if they're operating in an industry where growth could remain exceptionally strong for the next decade, if not longer. That's why cybersecurity giant Palo Alto Networks (NYSE:PANW) makes the cut as a growth stock to consider buying right now.
Generally, a company can't be both a growth stock and a defensive play. We often think of defensive industries, such as utilities, as sort of boring and slow-growing, but well-positioned during periods of economic weakness. Meanwhile, we think of growth stocks as fast-growing, but susceptible to weakness during an economic contract or recession. But Palo Alto can fill both roles, as it's set to double its sales every four or five years because cybersecurity has become a basic need service in any economic environment, regardless of business size.
Also working in Palo Alto's favor is the fact that it's steadily shifting its cybersecurity focus away from lumpier hardware sales and toward subscription services. In the first six months of fiscal 2020, Palo Alto's subscription and support services accounted for nearly 70% of sales, up from 62.5% of sales at the halfway point of fiscal 2019. This is noteworthy given the substantially higher margins associated with subscriptions, as well as the predictability of cash flow that comes with subscription contracts.
In the years to come, Palo Alto is likely to continue making add-on acquisitions to improve its cybersecurity reach, and is almost certain to aggressively reinvest its operating cash flow into solutions that'll bolster its cloud-protection market share. This should translate into explosive growth in its cash flow by the mid-2020s.
Another top growth stock that's bound to find its way into more portfolios is healthcare solutions provider Livongo Health (NASDAQ:LVGO). Though Livongo's had one heck of a run higher lately, and a pullback may occur, understand that I'm counting on Livongo to excel for the next decade and beyond and am not trying to guess where it'll be 30, 90, or 180 days from now.
What makes Livongo so special is the way the company approaches treating patients. Livongo's primary focus is on helping people with chronic diseases, such as diabetes and hypertension, take better care of themselves. Diabetics already have to worry about numerous co-morbidities associated with their disease, and can often get sidetracked when it comes to properly managing their blood glucose levels. By utilizing mountains of data aggregate and artificial intelligence, Livongo's solutions are able to incite behavioral changes in patients so they live healthier lives.
Not only does this sound great on paper, but it's translating into significant growth. Diabetes Member count has grown from 69,000 at the end of the first quarter in 2018 to 328,000 at the end of Q1 2020, with client count increasing to 1,252, which was up 44% just over the sequential quarter. Keep in mind that at 328,000 members, Livongo doesn't even penetrated 0.1% of the U.S. diabetic market, as of yet. That's a massive future patient pool.
Furthermore, Livongo has telemedicine tie-ins -- and anything related to telemedicine is especially hot right now due to the coronavirus. Livongo's solutions allow important data to wirelessly transmit to physicians, giving doctors the ability to monitor their patients from the safety of their homes or clinical settings.
Having now produced two consecutive quarterly profits, fast-growing Livongo Health looks set to turn the corner on recurring profitability.