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2 Stocks at Huge Discounts Despite Stellar Growth

By Matthew Frankel, CFP® - Apr 7, 2021 at 6:23AM

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Both of these companies are producing strong results but are well off their highs.

It's not a big secret that many of the past year's high-flying tech stocks have experienced a bit of a pullback lately. Many of the stocks with the strongest performances in 2020 are getting a little breather this year.

These include some companies that have seen massive drops in their stock prices despite reporting fantastic growth momentum in their business. Two in particular that are worth a closer look right now are Lemonade (LMND -3.23%) and MercadoLibre (MELI 0.69%), which are now down 48% and 23%, respectively, from their 52-week highs.

Man holding lemon halves over eyes.

Image source: Getty Images.

Lemonade's business could just be entering its high-growth phase

At first glance, Lemonade's business looks like it's doing extremely well. In-force premium (essentially the total of the company's active insurance policies) grew by 87% year over year in the fourth quarter, and gross earned premiums increased by 92%. What's more, the average customer is spending 20% more on insurance premiums than a year ago, and the company's loss ratio fell significantly, putting it a step closer on its path to profitability.

Surprisingly, the insurance stock has plunged by more than 25% since it released those results. Some of the decline can likely be attributed to the overall pressure on growth stocks as many investors rotate into value and interest rates have started to tick upward. And some of it can be the fault of Lemonade's own guidance, which was a bit weaker than analysts were looking for.

But it's important to mention that Lemonade just rolled out its life insurance product in the first quarter, so we haven't seen any results yet. Not only is life insurance by far the largest insurance market Lemonade has entered so far (about $800 billion globally), but it's also just begging for an alternative approach.

While things like auto insurance, homeowners insurance, and even pet insurance have become much more high-tech and easier in recent years, the life insurance process is generally pretty terrible. You have to deal with a salesperson, submit to medical exams, and more. So if Lemonade can keep its momentum going in this high-potential market, the company's true high-growth period might still be yet to come.

MercadoLibre's business only doubled over the past year

Another stock that declined after a seemingly excellent quarterly report was MercadoLibre, which operates a massive e-commerce marketplace as well as a payment processing service in Latin America.

Simply put, growth has been phenomenal. The e-commerce platform's gross merchandise volume increased 110% year over year in the fourth quarter to an annualized rate of about $26 billion. Nearly 230 million items were sold on the platform, also more than doubling from a year ago. And this was the least exciting part of MercadoLibre's growth.

On the fintech side, Mercado Pago processed $15.9 billion in payments, a 134% year-over-year increase. And most encouraging was the 150% growth in off-platform payments (payments for sales outside of MercadoLibre's marketplace).

Sure, these numbers look huge on both sides. But keep in mind that MercadoLibre's merchandise volume is about 4% of Amazon's (AMZN -1.32%), and Mercado Pago's roughly $64 billion in annualized volume isn't even close to the $1 trillion of payment volume flowing through PayPal's (PYPL -0.81%) ecosystem. So the "Amazon of Latin America" could still have plenty of room to keep its rapid growth alive.

Expect volatility, but these are long-term winners

To be perfectly clear, I think both of these businesses (and their shareholders) will be big winners over the long run. Both have massive addressable market opportunities and clear competitive advantages that should allow them to continue to grow rapidly.

But I have no idea what their stocks will do over the short run. If any negative catalysts for high-growth stocks (such as a spike in interest rates) were to occur, it's entirely possible they'll go down from here. The bottom line is that these companies only make sense if you have years to let their growth stories play out and aren't concerned with taking a bit of a roller coaster ride in the meantime.

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Stocks Mentioned

Lemonade, Inc. Stock Quote
Lemonade, Inc.
$20.36 (-3.23%) $0.68, Inc. Stock Quote, Inc.
$2,231.28 (-1.32%) $-29.82
Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
$800.43 (0.69%) $5.47
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$78.19 (-0.81%) $0.64

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

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