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3 Stocks to Add to Your Portfolio in a Market Pull-Back

By Ryan Downie – Sep 19, 2021 at 10:00AM

Key Points

  • This high-growth semiconductor stock has an aggressive P/E ratio right now.
  • This restaurant stock can produce great cash flow and growth if you buy on the dip.
  • This fintech stock is slightly too expensive to be considered a value stock.

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These great stocks are just a little too expensive to be perfect investments right now.

Stocks are expensive right now, with the S&P 500 price-to-earnings ratio at its highest level since the dot-com bubble. That doesn't mean that investors should be selling all their stocks and waiting for the next crash. It could be a while until a correction occurs, and that sort of strategy would have caused you to miss out on the past year of market growth.

Still, some shrewd investors have built more defensive portfolios and are waiting for a pull-back to scoop up great companies that happen to have aggressive valuations right now. These three stocks are great opportunities that you should consider if they get any cheaper.

Nvidia

Nvidia (NVDA -1.19%) is a rockstar tech stock with outstanding growth catalysts, and it's returned more than 230% since the pandemic market bottom in March 2020.

Chart showing upward trend in Nvidia's price.

NVDA data by YCharts

Nvidia is the global market leader in PC graphics processor units (GPU), with 83% market share. The company supplies microchips that are essential for gaming, high-performance video, and other applications that require more advanced visual hardware. The global video game market is expected to grow more than 12% annually over the next five years, and high-resolution video content continues to become a preferred media for consumers. Those factors alone provide catalysts for Nvidia for the foreseeable future.

However, Nvidia's opportunity isn't limited to gaming and personal computing. The company's chips have important applications in data centers, the automotive and autonomous vehicle industry, artificial intelligence and automation technology, and 5G network infrastructure. Connection to those trends provides an even more enticing growth opportunity.

What's the catch here? Nvidia is expensive. Its forward price-to-earnings ratio of 55 is high relative to most other semiconductor stocks, and it's substantially higher than Nvidia's own recent historical levels. Even the PEG ratio, which takes into account the company's bullish growth forecast, indicates an expensive-looking stock.

Chart showing upward trend in Nvidia's PE Ratio (Forward 1y).

NVDA P/E Ratio (Forward 1y) data by YCharts

Overall, it seems that Nvidia is a great stock to own, but there might be less expensive alternatives that can deliver better fundamentals for the price. If there's a market pull-back anytime soon, Nvidia should be one of the first stocks to consider at a lower price.

Happy children with stock chart in background.

Image source: Getty Images.

Chipotle

Chipotle Mexican Grill (CMG 1.65%) is a chain of well-known, fast-casual restaurants. The company has managed to endure a handful of scandals and an unprecedented pandemic, and it just keeps on growing. The chain's perceived value, nutrition, quality, and convenience clearly resonate with consumers. With double-digit growth forecast for this year and next, it doesn't seem like there's any reason to expect Chipotle to falter soon.

Chipotle has plenty of avenues for continued growth that excite investors. It has fewer than 2,900 locations, less than half of its sales are from its digital channel, and delivery services only produce 1% of total revenue. The company produces substantial cash flow, and the only debt on its balance sheet is related to operating lease obligations, not loans. That limits financial risk and means that Chipotle could easily source capital for growth if the need arose.

Once again, the issue here is really about valuation. Chipotle has often attracted aggressive valuation multiples, and its 56 forward P/E ratio seems more characteristic of a tech company than an established restaurant chain. Its enterprise-value-to-EBITDA ratio of 50 indicates that it's not a situation in which earnings per share misrepresent true profits. Chipotle is simply expensive to own. If the market gives you an opportunity to scoop up some shares at a more attractive price, it's worth consideration.

Visa

Visa (V -1.04%) is a household name with a brand that's nearly synonymous with credit and debit cards. People see that logo every day, and it's also featured on the front doors of countless restaurants and retailers that accept Visa cards. There's more going on under the surface here, too, and this company offers some exposure to a wider fintech revolution that's been occurring.

Visa is really a payment processing network with global reach, rather than a credit card supplier. This is a rapidly evolving landscape with the likes of Square (SQ 1.21%), PayPal (PYPL -2.87%), countless ambitious start-ups, and various blockchain solutions springing up to bring efficiency and security to digital payments and transfers.

Visa remains competitive by making acquisitions and creating partnerships with innovators that might otherwise turn into competitors. Regulators blocked its acquisition of Plaid, and Visa pivoted by purchasing the B2B cross-border payment platform Currencycloud and Tink, a European open-banking platform for consumers.

Visa offers a compelling business narrative, but its value as an investment is a bit less straightforward. It's hard to consider this a value stock with a forward P/E ratio of 30.6 and a 0.6% dividend yield. Like many other stocks, Visa is near the high end of its recent range for the P/E ratio.

Chart showing upward trend in Visa's Normalized PE Ratio (Annual).

V Normalized PE Ratio (Annual) data by YCharts

On the other hand, Visa is mature compared to other fintech stocks and doesn't have quite the same growth prospects. It's also in a tough spot as the incumbent power in an industry that's undergoing rapid evolution. If we have a market correction, Visa would suddenly look a lot better as a value investment with more upside than most. If the stock's price dips around 15%, its PEG ratio would creep toward 1.5. At that valuation, I would buy Visa hand over fist as a cash flow generator with uncommon growth potential.

Ryan Downie owns shares of Nvidia, Square, and Visa. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Nvidia, PayPal Holdings, Square, and Visa. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Nvidia Stock Quote
Nvidia
NVDA
$156.39 (-1.19%) $-1.88
Chipotle Mexican Grill Stock Quote
Chipotle Mexican Grill
CMG
$1,552.72 (1.65%) $25.16
Visa Stock Quote
Visa
V
$209.06 (-1.04%) $-2.20
PayPal Holdings Stock Quote
PayPal Holdings
PYPL
$77.64 (-2.87%) $-2.29
Block, Inc. Stock Quote
Block, Inc.
SQ
$62.11 (1.21%) $0.74

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

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