No one anticipated that this year's operating conditions would be defined by a pandemic that would spur widespread social distancing and shelter-in-place initiatives. The coronavirus plunged the U.S. economy into a state of recession and triggered the biggest annual quarterly GDP decline in the country's history, but some companies were well positioned for success amid the unexpected conditions and are delivering stellar business performances that are driving market-crushing stock gains.
We asked three Motley Fool contributors to spotlight a company that's poised to see continued tailwinds from stay-at-home conditions and deliver great returns for shareholders. Read on to see why they identified CrowdStrike Holdings (CRWD -2.04%), Peloton Interactive (PTON -4.12%), and BJ's Wholesale (BJ -2.49%) as top stocks to buy this month.
This cybersecurity leader is a monster stock in the making
Keith Noonan (CrowdStrike Holdings): Signs point to the telecommute trend continuing to get a big boost for the foreseeable future. Harvard University will conduct all classes for the upcoming academic year online. Microsoft will be extending work-from-home measures until at least January. Alphabet's Google division plans to keep all of its employees on a remote-work basis through June 2021. More important information being transmitted through digital channels means a heightened need for cybersecurity solutions, and some companies are positioned to capitalize.
CrowdStrike is a cybersecurity provider that specializes in endpoint protections -- meaning it helps stop bad actors from gaining access to networks through hardware including computers, mobile devices, and servers. Demand for the company's services was already skyrocketing prior to the unprecedented conditions created by the coronavirus pandemic, and the current conditions are only making the company's services even more essential.
CrowdStrike stock is already priced for big growth trading at roughly 32 times this year's expected sales, but that valuation quickly loses its shock value when placed in the context of the business's rapid expansion and huge profit potential. The company's market share nearly doubled last year, and providing a top-rated service in a fast-growing category is a recipe for more dramatic growth.
The company added 830 new subscription customers last quarter, pushing the count above 6,260 and representing growth of 105% year over year. This momentum helped first-quarter sales come in 85% higher than the prior-year period. And while CrowdStrike is currently operating at a loss, it should have no problem delivering big profits when it eases off on spending to drive growth. The company posted free cash flow of $87 million on sales of $178.1 million last quarter -- a mouthwatering performance enabled by a 77% gross margin for its subscription services.
The business still has big room for growth as more institutions adopt its services and the company bridges customers on to additional service offerings. Device-level protections will only become more important over the next decade, and that's an operating environment that bodes very well for CrowdStrike.
The at-home fitness leader
Joe Tenebruso (Peloton Interactive): Peloton may be the quintessential stay-at-home stock. The maker of internet-connected exercise bikes and treadmills is experiencing booming demand for its products during the coronavirus pandemic, as more people choose to work out in the comfort and safety of their own homes.
Peloton's revenue surged 66% year over year to $524.6 million in the third quarter, fueled by strong sales of its at-home fitness products and digitally delivered exercise class subscriptions. Peloton's connected fitness subscribers -- customers who purchased one of its bikes or treadmills and pay a monthly fee to access classes -- soared 94% to 816,100.
Peloton is not yet profitable -- it generated a $55.6 million net loss in the third quarter -- because it's wisely focusing on expanding its share of the massive fitness industry. Roughly 90 million gym members have been impacted by COVID-related closures in Peloton's core markets. So despite its torrid growth, Peloton has just barely penetrated this huge addressable market.
To further its growth, Peloton is reportedly developing a lower-cost version of its popular treadmill. With a rather hefty price tag of $4,295, Peloton's existing treadmill isn't affordable for most fitness enthusiasts. A lower-cost option could thus allow Peloton to broaden is customer base and expand its connected fitness subscriber network.
Moreover, the at-home fitness trend isn't likely to end even after the COVID-19 crisis subsides. Many people no longer find crowded, sweaty gyms appealing. And with millions of people investing in their own exercise equipment and experiencing the timesaving and convenience benefits of working out in their own homes, many will choose to continue to do so in the years ahead. As a leader in at-home fitness equipment and online exercise classes, Peloton stands to benefit from this trend more than perhaps any other company.
An e-commerce player investors often forget
Will Healy (BJ's Wholesale): When most investors think of omnichannel retailing, they probably think of Walmart (WMT -1.33%) or Costco (COST -1.65%). However, those not on the East Coast often forget about BJ's Wholesale.
As Walmart and Costco began turning their focus toward omnichannel, BJ's also expanded its stay-at-home shopping options. In February 2018, a few months before the company launched its IPO, it created a new VP position for digital commerce to drive its omnichannel operation.
However, investors may have just recently taken notice of BJ's stock amid COVID-19. The pandemic helped comparable sales (excluding gasoline) rise by 27% year over year. Net income increased by 176% over the same period.
Also, free cash flow during the quarter came in $434.7 million. This figure exceeded annual free cash flow in each of the last three years. Commenting on that figure on a recent earnings call, CFO Robert W. Eddy stated an intent to turn one quarter of cash flow into "many years of growth."
This should mean new store openings that would further drive growth in memberships and online sales. It could also relieve the company's long-term debt of over $1.3 billion. This is a significant burden considering the market cap of about $5.8 billion and BJ's struggle to maintain a positive book value.
Since the results were announced on May 21, BJ's stock has risen by 39%. It has also increased by more than 120% from the March low.
However, despite this surging stock price, investors may still have time to buy BJ's stock at a reasonable price. The forward P/E ratio of 18.5 comes in well below that of Walmart, Costco, and Amazon (AMZN -8.43%).
Still, analysts forecast that massive earnings growth this year will probably mean a modest reduction in net income next year. Nonetheless, this could still set up BJ's for profit increases averaging in the double digits longer term.
As BJ's footprint moves gradually westward, it will likely position the company for increased in-home shopping activity and continued stock price increases.