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These Growth Stocks Are Bargains Because of 1 Unreasonable Fear

By Dan Caplinger – Jul 27, 2021 at 2:24PM

Key Points

  • Shares of United Parcel Service dropped despite strong financial results.
  • Investors are scared that e-commerce will slow down.
  • The long-term play in e-commerce remains entirely intact.

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Don't let a single day's market movements make you lose your long-term mindset.

Tuesday morning was a tough time on Wall Street as market participants focused on the negatives among stocks. Between concerns about the sustainability of macroeconomic growth, and uncertainty regarding the future of monetary and fiscal policy, investors chose to sell first and ask questions later. As of noon EDT Tuesday, the Dow Jones Industrial Average (^DJI 0.10%) was down 221 points to 34,924. The S&P 500 (SNPINDEX: ^GSPC) lost 44 points to 4,378, and the Nasdaq Composite (NASDAQINDEX: ^IXIC) was lower by 283 points to 14,558.

The e-commerce area was among the hardest hit on Tuesday as investors tried to determine whether the strong performance of the sector could continue. Yet with promising financial results from both established and emerging growth leaders, there's a good argument that investors are overly and irrationally pessimistic. Below, we'll look at how that played out in today's markets and which stocks look like bargains right now.

Failing to deliver?

The fear about e-commerce showed itself most clearly in shares of United Parcel Service (UPS -0.42%). The delivery giant produced strong financial performance, but its stock fell more than 8 %.

Boxes rolling down multiple conveyor belts.

Image source: Getty Images.

By all accounts, the results from UPS looked extremely attractive. Revenue was up 14.5% year over year to $23.4 billion. Earnings of $3.06 per share on an adjusted basis were higher by nearly 44% from year-ago levels. UPS's international business stood out for its strength, as segment revenue soared 30% and helped produce a 41% rise in adjusted operating profit. Gains both domestically and in the UPS supply chain solutions segment also contributed to positive performance.

Yet investors seemed concerned about what the rest of the year might look like. The outlook that UPS gave offered only a few metrics, including operating margin, return on invested capital, and various capital allocation decisions. Some fear that sales could slow, weighing on profits and signaling a potential end to the e-commerce boom.

The UPS investor day presentation in June talked about numerous growth initiatives the delivery giant was pursuing. Yet with some thinking COVID-19 vaccination programs will lead to reduced e-commerce activity overall, a key driver of growth for UPS might turn into a headwind.

The death of e-commerce is greatly exaggerated

That sentiment seemed to move across the entire e-commerce industry. Consider the following stock moves:

  1. Amazon.com (AMZN -1.44%) gave up almost 3% early Tuesday afternoon, leading much of the broader U.S. stock market lower.
  2. In the Asia-Pacific region, investors had even gloomier outlooks. Sea Limited (SE 0.38%) fell almost 9% on the day, while Chinese giant Alibaba Group Holdings (BABA 4.79%) was down nearly 6%.
  3. Other international e-commerce plays also struggled. MercadoLibre (MELI 0.43%), for example, was down almost 2% as the Latin American market was unable to avoid the downward pressure.

Yet all the short-term comments about losing pandemic-driven tailwinds ignore the fact that shoppers across the world are getting more and more comfortable with buying things online. E-commerce isn't going anywhere, and when stocks take hits because of short-term concerns, it can create bargain opportunities for those who are quick to jump on them. That might well be what's happening here. Those interested in the high-growth potential of e-commerce in the years to come should look at pullbacks like these as chances to add to positions.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of Amazon and MercadoLibre. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Amazon, MercadoLibre, and Sea Limited. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Stocks Mentioned

United Parcel Service Stock Quote
United Parcel Service
UPS
$189.39 (-0.42%) $0.80
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,429.88 (0.10%) $34.87
Amazon.com Stock Quote
Amazon.com
AMZN
$94.13 (-1.44%) $-1.37
MercadoLibre Stock Quote
MercadoLibre
MELI
$945.07 (0.43%) $4.06
Alibaba Group Stock Quote
Alibaba Group
BABA
$90.06 (4.79%) $4.12
Sea Stock Quote
Sea
SE
$61.38 (0.38%) $0.23

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

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