After a months-long run-up, the broader market has been a bit more volatile over the last week or so and had some down days. While most investors welcome a rising market, the fact is many stocks are becoming overvalued. This complicates investing as it leaves fewer solid stocks available to buy at reasonable prices. Most everything is trading at elevated prices.
However, thanks to this recent lower move in the major indexes, some stocks have become more attractive to buyers. For investors who have $1,000 in cash they would like to put to work through stock purchases, BJ's Wholesale (BJ 0.14%), Innovative Industrial Properties (IIPR -2.90%), and StoneCo (STNE -2.10%) could offer outsized returns in both the near- and the long-term.
Let's take a closer look at these three stocks and see if now is the time to buy.
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1. BJ's Wholesale: 300% jump in digital sales in Q2
Many investors wish they had bought stock in Walmart or Home Depot when they were both regional companies eyeing expansion across the U.S. BJ's Wholesale could offer them a second chance to make such an investment.
BJ's operates warehouse clubs primarily on the East Coast of the U.S., competing most directly with Sam's Club and Costco in that region. With its high debt and low sales growth, investors showed little interest when it launched its second IPO in 2018.
However, COVID-19 may become the best thing that ever happened to this retail stock. The slow growth of the past gave way to 24% comparable sales growth in the fiscal 2020 second quarter and a 300% increase year over year in digital sales. This also gave the company a free cash flow of more than $220 million for just this quarter. This is notable since BJ's generated just under $180 million in free cash flow in all of fiscal 2019.
The cash infusion has helped the company reduce its long-term debt. It has also helped the stock more than double in value since March. Despite the higher stock price, BJ's stock trades at just under 16 times forward earnings. This is a much lower P/E ratio than Costco or Walmart. It is also a low price for a company projected to deliver over 80% earnings growth from year-ago levels, according to Wall Street analysts. At a market cap of around $5.8 billion, investors should consider BJ's while it still is a mid-cap stock.
2. Innovative Industrial Properties: Benefitting from the cannabis industry
Another mid-cap eyeing expansion is Innovative Industrial Properties. Given the massive drop in marijuana stocks in recent months, investors have become leery of this industry. However, the good news for Innovative Industrial Properties investors is that it is a real estate investment trust (REIT), not a cannabis stock. It just provides the building space for many cannabis companies to operate in.
Innovative Industrial does not produce or sell marijuana-related products. In fact, the company actually profited from the demise of cannabis stocks.
Due to a cash crunch, many smaller outfits sold their facilities to Innovative Industrial in a leaseback deal that expands the REIT's asset base while allowing cannabis companies to maintain production. Grand View Research forecasts a compound annual growth rate (CAGR) for the U.S. cannabis industry of 18.1% through 2027. This indicates that Innovative Industrial should have no trouble continuing this practice.
In the most recent quarter, the company generated $24.3 million in revenue, a 183% increase year over year. Adjusted funds from operations (AFFO) -- a REIT's equivalent to earnings -- came in at $1.19 per diluted share, a 263% increase from the same quarter last year.
This helps fund an annual dividend that has risen to $4.24 per share, a yield of about 3.6%. The payout has increased every year since the company began paying dividends in 2017.
Moreover, the stock is reasonably priced considering its growth rate. Innovative Industrial stock trades at just over 22 times forward earnings. This buys investors a profit growth rate expected to come in at about 60% this year and around 64% in fiscal 2021.
3. StoneCo: Offering fintech solutions for Latin America
Like Innovative Industrial, StoneCo has not become a household name in the U.S. Nonetheless, it has emerged as a fintech giant in Latin America. It has also attracted interest from Warren Buffett's Berkshire Hathaway.
StoneCo provides fintech solutions in Brazil to facilitate e-commerce across in-store, online, and mobile channels. However, investors should not assume that StoneCo is merely the Brazilian version of PayPal or Square. Brazil is primarily a cash-based society. Hence, it also faces the challenge of serving customers who do not hold debit or credit cards.
For this reason, Latin American e-commerce giant MercadoLibre is its most direct competitor. It also means that StoneCo could potentially take this business model to other Latin American, cash-based countries, such as Argentina, Colombia, or Mexico.
At a forward price-to-earnings ratio of about 51, StoneCo does not appear cheap. Also, COVID-19 has hurt its business to some degree. The company managed to increase revenue by almost 14% year over year. However, despite that improvement, rising expenses caused earnings per share to fall by 21% from year-ago levels.
For the year, analysts expect only about 2% earnings growth. Nonetheless, in fiscal 2021, analysts forecast profits to rise by almost 77%. This should make the elevated multiple more palatable. It should also continue to profit investors as it helps make e-commerce possible across Brazil and possibly other countries in the region.
