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2 Hyper-Growth Stocks to Buy in the Next Bear Market

By Lawrence Nga - Feb 27, 2021 at 8:15AM

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These emerging leaders in their respective markets look to have years of growth ahead of them.

Last year was a roller-coaster ride for investors. After posting its fastest 30% drop ever, the S&P 500 (^GSPC 0.01%) staged a stunning comeback, driven by a wave of stimulus-fueled liquidity and monetary easing.

This month, the stock market hit fresh record highs. But cracks in the facade are starting to show. Last week and part of this week, the S&P 500 dropped for five straight sessions -- its longest losing streak in a year.

We don't yet know if this is a brief pullback or the beginning of a big correction. What we do know, however, is that rallies never go uninterrupted. We also know the broader economy remains in shambles due to COVID-19.

But don't panic. Instead, get excited -- a bear market is a great time to buy great stocks -- including hyper-growth names like Sea Limited (SE 3.60%) and Pinduoduo (PDD -2.73%).

Bear market cartoon.

Image source: Getty Images.

Why Sea Limited should be on your radar

For many companies, 2020 was a year to forget. But for Sea, it was a year to remember. 

The pandemic supercharged demand for Sea's gaming, e-commerce, and digital finance businesses as socially distanced consumers adjusted to life in the new normal.

In the third quarter, the number of active users for Garena, Sea's gaming division, grew 78% year over year to a staggering 572 million. Shopee, Sea's e-commerce arm, experienced a 131% surge in gross orders to 742 million -- leading to a 103% jump in gross merchandise volume (GMV). Sea's digital finance business -- the smallest of its three segments -- also saw strong adoption, with paying users surpassing 17.8 million. As a result, revenue almost doubled to $1.2 billion.

And Sea's just getting started. As the company expands across Southeast Asia and Latin America, investors can expect it to keep up its impressive momentum. In that regard, Sea has plenty of growth levers to pull. For one, it could further monetize its gaming and e-commerce businesses. Its e-commerce business also has a long growth runway, given Southeast Asia's low levels of e-commerce penetration. Analysts expect Sea's revenue to grow by 78% in 2021 and 46% in 2022.

It should be no surprise, then, that Sea trades at almost 40 times trailing 12-month revenue. But before you take the plunge, consider this: Amazon (AMZN 0.25%) -- the world's biggest e-commerce company -- trades at 4.2 times sales. 

Over the long term (five to 10 years), Sea looks poised to trounce Amazon's returns. But given the premium the shares carry currently, it would be prudent to wait for a pullback before buying in.

Pinduoduo has posted impressive gains

I'm an avid fan of e-commerce platform operators like Alibaba (BABA -1.03%), JD.com (JD -1.16%) and MercadoLibre (MELI -3.23%). Operating in winner-take-most markets, these businesses have generated impressive gains for their shareholders.

But Pinduoduo is trumping them all. Despite being a relative newcomer -- it came into existence only in 2015 -- its GMV has grown to 1.5 trillion yuan ($215 billion) in the last 12 months. That's almost half of Amazon's 2020 GMV of $475 billion.

In fact, Pinduoduo has already overtaken JD.com to become China's second-biggest e-commerce platform. In the third quarter, it reported 731 million active buyers (customers who made at least one purchase in the last 12 months). In the next few quarters, I think Pinduoduo will report more active buyers than Alibaba.

Its revenue grew 44% during the quarter when China first imposed statewide lockdowns, demonstrating that the company can handle external shocks. But Pinduoduo didn't just survive COVID-19, it delivered blowout growth -- a testament to its extremely scalable business model. In the third quarter, revenue surged 89% to $2.1 billion. On top of that, Pinduoduo reported $69 million in non-GAAP profit -- its first net profit ever. That's no small feat for a company that had zero revenue in 2015.

Despite its spectacular rise, Pinduoduo's best days are yet ahead. The company boasts a fast-growing platform almost as large as Taobao and Tmall, the marketplaces that Alibaba owns. Yet Pinduoduo's annual revenue is just a fraction of Alibaba's $14 billion in China-based e-commerce revenue for the same period. That leaves Pinduoduo with lots of room to grow.

To capture this opportunity, it is entering new shopping categories, and also expanding its agriculture business. It could even launch ancillary ventures in areas such as logistics and payments -- which is what Alibaba has done with Alipay and Cainiao, among other businesses

Pinduoduo has truly exciting growth prospects -- which could explain why the stock trades at a whopping 36 times trailing 12-month revenue. For perspective, Alibaba trades at a fourth of that multiple.

Like Sea Limited, Pinduoduo's a great growth stock. But both companies trade at pricey valuations now. It would make much more sense to buy into them at discounts to their current levels -- and the chance to do that may appear if a bear market does.

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Stocks Mentioned

Sea Limited Stock Quote
Sea Limited
SE
$79.66 (3.60%) $2.77
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,901.36 (0.01%) $0.57
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,151.82 (0.25%) $5.44
Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
MELI
$775.65 (-3.23%) $-25.92
JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$52.17 (-1.16%) $0.61
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$86.79 (-1.03%) $0.90
Pinduoduo Stock Quote
Pinduoduo
PDD
$40.90 (-2.73%) $-1.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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