To those who started paying more attention to the stock market in the past year, it may seem volatile. It's bound to feel that way after the steepest 30% drop in history last March, followed by the fastest recovery. Experienced investors have come to expect the ups and downs. On average, the market drops at least 10% more than once every two years.
The best way to work with these drops as opportunities is to have a list of great companies to buy when negativity is everywhere. Lululemon (LULU 1.74%), Paycom (PAYC -1.73%), and Align Technology (ALGN -1.63%) have happy customers fueling growth. That should keep these stocks on the buy list for the next big sell off.
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1. lululemon
The pandemic fundamentally changed how many of us approached work attire. Suits and dresses were replaced by stylish athletic wear that was both comfortable and suitable for a Zoom call with colleagues. The trend, known as athleisure, was in place before the pandemic, and no company has benefited more than lululemon.
The retailer is much more than its famous yoga pants. In fact, clothing for men made up 21% of the $2.7 billion in revenue for the nine months ending Nov. 1. Revenue for fiscal 2021 ending in January is expected to come in near $4.3 billion, 9% greater than 2019 despite a pandemic closing almost all of the company's stores for at least part of the year. That was made possible thanks to direct-to-consumer -- its internet sales -- which grew 94% year over year. It turns out that customers wanted the company's products even when the mall was closed. Management continued to grow the physical footprint even in the midst of restrictions, adding more than 30 new stores last year.
Success through an economically difficult time shouldn't be surprising. Although it was a much younger company, lululemon also weathered the great financial crisis in style. Year-over-year revenue growth for 2008 through 2010 was 82%, 31%, and 28%, respectively. After flourishing through two recessions and posting nearly 300% stock gains in the past three years, lululemon could be a great stock to buy the next time fear dominates the market.
2. Paycom
The old school method of human resources staff inputting data for employees is coming to an end. That's in no small part thanks to companies like Paycom, the provider of cloud-based human capital management software. Now, companies and their employees can manage things like time and attendance, payroll, and recruiting through one platform. The company's advantage is having a single database, housing all of the relevant data for an employee. This creates a much better (and more accurate) experience than legacy competitors' products that have been cobbled together from acquisitions, forcing unreliable data integrations behind the curtain.
Customers are clearly happy. Revenue retention for 2020 was 93% even though many businesses closed or reduced the number of workers. Contrast that with legacy competitors Paychex (PAYX -1.65%) at 83% and ADP (ADP -0.54%) at 91%, both of which recently set retention records. Total client count expanded to nearly 31,000, driving $841 million in revenue, amounting to 14% year-over-year growth. Management is guiding to 20% growth in 2021 and a ninth consecutive year of earnings. Add in a fourth straight year on Fortune's list of the 100 fastest growing businesses and the No. 3 ranking in a list of best places to work in the U.S., and the stock's 1,000% gain over the past five years makes sense. Investors looking for a software-as-a-service (SaaS) company but afraid of high valuations and lack of profits, might find shares of Paycom irresistible during the next downturn.
3. Align Technology
Align is known for its invisible teeth aligners, but the business should earn some extra applause for the way it's vertically integrated key elements of its supply chain over the years. In 2011, the company acquired a manufacturer of popular intra-oral scanners for dentistry and orthodontics. Just last year, it bought a maker of computer-aided design and manufacturing software. Together, the software, hardware, and aligners give Align control over much of the end-to-end workflow. That workflow extends from the initial patient inquiry, through determining what approach will yield the best results, to ultimately creating and implementing a solution. The integrated digital platform also helps orthodontists see more patients and provide a better experience, so it's great for all involved.
Despite revenue being down 41% in the second quarter of 2020, the pandemic couldn't keep Align from growing for the full year. Sales set a record in the fourth quarter and finished up 2.7% for the full year at $2.5 billion. In addition to office openings, the company was able to make up for the disastrous second quarter by rolling out virtual solutions to keep doctors and patients on schedule even when they couldn't share the same physical space. Innovations like this further solidify Align's position as the best for patients and doctors.
The addition of virtual tools should continue to pay off beyond the pandemic. Utilization -- the number of cases shipped divided by the number of doctors who received cases -- has trended sharply higher in the past few years and the tools promise to extend the gains. That measure of productivity hit a record of 67 in 2020 for North America, compared to only 37 in 2016. International utilization lags, but case cash shipments are growing fast, 41% in the fourth quarter. That is yet another way Align can maintain the 24% growth rate it has put up since Joe Hogan took the helm as CEO in 2015. For investors, the company's ability to adapt, huge international opportunity, and strong bond with doctors and patients should provide the confidence to buy if shares get caught up in a a marketwide sell-off.
