After falling deeply and quickly from late February through late March, the S&P 500 has bounced back pretty strongly. Yet even within that recovery, there are still plenty of stocks trading at much lower prices today than they were at the beginning of the year.
And after taking a bit of a break from buying stocks in April, I have resumed buying in recent weeks. There are still a lot of great companies trading at bargain prices. Two I recently bought more of are American Express (AXP 3.88%) and The Rubicon Project (MGNI 7.25%).
After all, these are three great businesses (though there are risks) that should prove able to survive the coronavirus crash and emerge in fine shape, trading a big discounts to their prices at the start of the year. The three are down 28% and 37%, year to date, versus an 8% dip for the SPDR S&P 500 ETF Trust (SPY 3.10%) since January 1.
Not convinced? Keep reading to learn why they're good enough for my own millionaire-maker portfolio, and why they could be stocks you should buy too.
Built for today and tomorrow
American Express has been around for more than a century, and management has had the foresight to reinvent the company multiple times in the past. Looking into the future, the good news is, AmEx doesn't need to build something new from scratch to still be relevant in the future this time around. It's already built for the changing way people will pay for things.
But let's start with today. At its core, American Express is a bank. It makes a lot of money from credit and charge card transaction fees, but unlike Visa (V 2.20%) and Mastercard (MA 3.71%) that operate the payment networks while bank partners do the lending, American Express is the one ponying up the money until its cardholders make their payments.
That adds another layer of risk that its peers don't have, and explains why its shares are down 28% this year while Visa and Mastercard stocks are about breakeven YTD. Yet even with the higher risk of losses as more borrowers fail to meet their payment obligations -- it happens whenever there's a recession -- so far, the company's customers have been paying on time.
That's not likely to last forever; the deeper we move into the recession, the more people will lose work and see income decline. American Express took steps to prepare for that, taking large provisions for loan losses in the first quarter, and increasing its cash position by 28% to $41 billion. Between the strong balance sheet and more creditworthy customers who are in the cohort most-likely to maintain their jobs the longest, American Express should be fine.
But back to the future: Even before COVID-19 forced more people to use e-commerce and touchless payments, the world was shifting away from cash toward electronic payments. A big factor in that is the global middle class expansion, a huge tailwind for American Express over the next decade.
That's why I decided to almost double my stake in the company in Mid-May while it's on sale. It's doing fine for now, and should do incredibly well in the decades to follow.
Greater than the sum of its parts
With limited exceptions, now isn't necessarily a great time to be in the advertising business. In recessions, one of the first things companies cut from their budgets is advertising. It's quick-turn spending, usually without any sort of long-term or fixed commitments. It's an easy expense to turn off.
As a result, Rubicon Project has seen its stock price get crushed, and then get crushed again after its merger with Telaria closed in early April. While the S&P 500 rallied 33% since March 23, Rubicon's stock surge more than 40% but then gave back almost all those gains and is now up about 4% from the 2020 bottom.
But the post-merger Rubicon Project is a better, stronger business than it was at the start of the year. More advertising is moving digital, and the combined company is now the biggest sell-side advertising tech company in the U.S. With programmatic advertising spend shifting to connected televisions as steaming app consumption grows and broadcast viewership declines, the company now has the scale and offerings to dominate this still-small, but fast-growing, market.
Lastly, Rubicon is crazy-cheap everything you get. It has a pristine balance sheet with no debt and $71 million in cash, and despite losing $22.6 million on a GAAP basis over the trailing 12 months, it generated $30 million in operating cash and $8 million in free cash flow.
The result is a company that's built to ride out the downturn in ad spending, and then hit the ground running when economic activity picks up and marketers rush back to the ad market.
Buying now for a profitable future
The rest of 2020 could be pretty ugly for American Express. Even with most of its customers likely to remain employed and stay ahead of their bills, it also has a lot of business owners who use American Express, and increased defaults are a certainty. Rubicon Project doesn't have the same implications, but a protracted deep recession could force it to cut staff or investments in its business in a way that harms its ability to quickly return to growth when ad spending recovers.
But those risks look to be more than factored into recent share prices, and the long-term prospects for both are too good to ignore.