The S&P 500 benchmark fell nearly 35% from February through March, but it has since rallied over 35% from mid-March lows. The broader market is still down for 2020, but it's up over the past 52 weeks. Some individual stocks have been even more volatile. Some stock values have doubled and more since those March lows.
These rapid gains should be viewed as atypical; doubling in a matter of weeks isn't normal. And it can drive investors into a frenzy, making them desperate to gobble up shares of remaining undervalued companies, hoping for a profound short-term pop.
This article isn't about making predictions on near-term stock returns. It's for those willing to take a long-term investor mindset, to find companies like MercadoLibre (NASDAQ:MELI), Splunk (NASDAQ:SPLK), and Floor and Decor Holdings (NYSE:FND) that can make you rich. Let's find out a bit more about these three stocks and why they might be worthy of investment.
1. MercadoLibre: Accelerating trends in Latin America
Partly an e-commerce operation, partly a fintech upstart, MercadLibre has been a rewarding investment. The stock is up almost 500% over the last five years. And after a steep sell-off earlier in the year, the stock has surged ahead to establish new all-time highs. This outsized performance is entirely deserved.
Stay-at-home orders in Latin America, where MercadLibre operates, accelerated adoption of the e-commerce platform. During the first quarter of 2020, the company saw a drop in spending for nonessential items. But quarterly spending on essential items surged more than 100% year over year. Triple-digit growth likely means many consumers are giving MercadoLibre a try for the first time, which could be an enduring tailwind.
MercadoLibre didn't only record triple-digit growth in e-commerce, but also in its fintech solutions. Total payment volume (TPV) grew 82% in local currency when considering both purchases on MercadoLibre and off. But growth for TPV off-platform was 139%, good for another quarter of triple-digit growth. This strong growth means fintech now accounts for 42% of MercadoLibre's net revenue.
When you operate two business segments and both have triple-digit growth, that's a stock that can make you rich. Even with stellar returns to date, MercadoLibre's market capitalization is only just north of $40 billion. As one of the best-positioned e-commerce and fintech providers for an entire continent, it appears this company can grow much bigger long term.
2. Splunk: Betting on big data
Data-analytics company Splunk just reported results for the first quarter of fiscal 2021, and total quarterly revenue grew a meager 2% year over year. How can a low-single-digit growth stock make you rich?
Splunk is transitioning toward a subscription-revenue model. In Q1, annual recurring revenue (ARR) grew a more impressive 52% to $1.8 billion. This mirrors the 54% growth it reported for full-year fiscal 2020. The company is guiding for ARR to grow at a 40% compound annual growth rate for the next three fiscal years. That would put ARR at $4.6 billion by the end of calendar 2023.
Recurring revenue presents a challenge for investors. With traditional sales, income and expenses tend to line up on the balance sheet. But with recurring revenue, some expenses are recorded now while the revenue is recorded later. Therefore, you have to drill down a little deeper to understand a company's profitability trajectory. In Splunk's case (just looking at one line item), sales and marketing expenses grew 23% in fiscal 2020 from fiscal 2019, compared to 54% ARR growth. This expense only grew by 14% in Q1. As recurring-revenue growth outpaces expenses, Splunk is on a profitable path.
With still-developing trends like the Internet of Things and artificial intelligence driving machine-generated data creation, I'm betting big data will only get bigger over time. And the more raw data there is, the more opportunity Splunk has to provide insight into that data. Long term, I expect the company to find new use cases, driving further top-line growth and profitability.
3. Floor & Decor Holdings: Boring is OK, too
While the first two stocks are companies positioned to capture upside from developing trends, Floor & Decor Holdings is just a boring old brick-and-mortar home-improvement retailer. Its plan to enrich shareholders? Grow from 123 locations today to 400 within 15 years. This could be a cash-flow machine long term. Consider that it generated over $500 million in first-quarter net sales with just these 123 stores, and it recorded a 7% net-profit margin despite the costs of its rapid build-out.
Floor & Decor isn't immune to the coronavirus. While comparable sales grew 2.4% in Q1, they plummeted 46% during the last six days of the quarter. In April, comp sales were down 50% from last April. As bad as this is, it's not a long-term demand issue. The company had to close many stores, and e-commerce isn't practical for heavy flooring.
Floor & Decor has the liquidity to survive this time, and there's evidence of pent-up demand. Management said in the Q1 conference call that there's been a "surge" in sales of samples. It suggests that customers are still thinking about updating their floors, and once life returns to normal, F&D's sales will quickly return.
This is a company with a history of strong revenue and earnings growth poised to continue. Floor & Decor stock may only be 8% down from its all-time highs, but I believe there's still plenty of enriching upside left for those willing to hold for a decade or more.