Whether you're a seasoned investor or just getting started, it's never fun to see your holdings lose value. But if you're investing in growing companies with plenty of opportunities to expand over the long term, you can sleep well knowing that your investments will eventually bounce back.
With that in mind, here's why three Motley Fool contributors selected Poshmark (POSH), Lululemon Athletica (LULU 1.43%), and Chewy (CHWY 0.19%) as great stocks to buy during the current market sell-off.
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A small-cap stock with great long-term return potential
John Ballard (Poshmark): The secondhand clothing market is expected to grow at a compound annual rate of 39% through 2024, outpacing the growth of the broader apparel market and reaching $64 billion in annual spending. The growth of this market puts a growing secondhand marketplace like Poshmark in the sweet spot.
The company just completed its initial public offering earlier this year, and the stock hasn't performed that well, down 75%. But investors shouldn't mistake a falling stock price with the actual business performance, because Poshmark is doing great. Revenue in the first half of 2021 is up 31% year over year, which is consistent with the growth projection of the secondhand market. The stock's decline can be attributed to a high valuation at the time of the IPO, when the stock traded at a price-to-sales ratio of over 20. The business is continuing to grow as the stock falls, making now a good time to consider buying shares.
Poshmark has an advantage in that it carries no inventory. It makes money from charging a 20% fee on the final sale price of items over $15, or a flat $2.95 for items under $15. This should play to its advantage in the near term, given the supply chain disruptions caused by the pandemic. This asset-light model also means it relies on a diverse community of sellers to create a flexible marketplace that can adapt to the latest style preferences, which brick-and-mortar stores don't have the luxury of doing. This positions Poshmark to gain market share over the long term.
The company is still expanding into new categories and geographies. It now offers a pets category and recently launched in India, where there are over 622 million internet users.
The stock's decline has brought the company's market cap down to $1.85 billion on $300 million of trailing-12-month revenue. That's a price-to-sales multiple of 5.7, which should be more attractive to investors. Poshmark has become a popular place for millennials and Gen Z to shop, so I don't expect the stock to stay down forever.
An online retail company that's making sure pets stay fed and healthy
Parkev Tatevosian (Chewy): Chewy is an online pet retailer that benefits from the long-running trend of sales moving away from brick-and-mortar stores. It sells several products for pets, including fresh food, dry food, toys, beds, medication, and more. Chewy also offers a free telehealth service to customers who use its autoship feature.
Revenue is growing, more than tripling from $2.1 billion in 2018 to $7.1 billion in 2021. The growth results from a combination of factors such as an increasing share of spending moving online, an increasing selection of items on the platform, and millions of new customers.
The good news for investors is that Chewy's growing revenue is expanding its profit margin. From 2016 to 2021, the gross profit margin rose from 16.6% to 25.5%. As with most e-commerce retailers, profit margins can develop further as order sizes get bigger. That way, the company can ship packages with greater contents, and the shipping cost in relation to order value will be more negligible.
Moreover, pet spending is consistent for the most part. Folks are not likely to decrease spending on their pet's food if their income drops. Sure, they may not splurge on a new chew toy, but food and especially medications are likely to stay within the budget. That could mean, in a stock market crash, Chewy's stock can be had at a lower price while its business prospects remain relatively unchanged. That's precisely the type of stock investors should look for in a crash -- one where the price has dropped because of a market panic, but otherwise, whose business remains unchanged.
Chewy is not yet profitable on the bottom line and is trading at a price-to-sales ratio of 3.8. And during a market crash, it can probably be had at an even more favorable price.
Sweating its way to the top
Jennifer Saibil (Lululemon Athletica): It's rare for an apparel company to make such a splash in the markets, especially a technical apparel company going up against industry giant Nike. But Lululemon made its mark through its patented fabrics, strong digital presence, and focus on community.
Although sales took a dip during the pandemic when stores were closed, they quickly rebounded due to the omnichannel shopping options. In the 2021 second fiscal quarter (ended Aug. 1), revenue increased 61% over the prior year to $1.5 billion, completely wiping out declines from 2020. Almost all of the increase came from stores -- company-operated store sales increased 142%. Direct-to-consumer sales only increased 8%, but they accounted for 42% of sales. That's a percentage many other retailers are still dreaming about.
Even more, Lululemon runs a tight operation. Gross margin increased almost 4% to 58.1%, and net income rose 140% year over year in Q2.
These all come together to create a company that can challenge industry leaders and set the pace for what a high-growth company should look like. And that's why investors should expect more growth -- a lot more -- going forward.
Live classes have always been a key element of Lululemon's branding and a membership driver, and the company added a digital layer to this strategy during the pandemic. Unsurprisingly, it found that digital classes and events drove more engagement, and this rounds out its program of in-store and digital sales and in-store classes. Although Nike and other companies offer digital training options, the in-store experience is unique to Lululemon and feeds its community-building.
Lululemon made its first acquisition last year in connected fitness company Mirror, which expands its business and creates a reciprocal sales funnel. The company didn't break out Mirror's sales, other than saying it was "pleased with its performance," but it has already opened Mirror shops-within-shops in 150 American stores and has plans for another 50 in time for the holidays.
Based on all of this success, management said the company is on track to reach the goals it set for itself for 2023 by the end of this year. CEO Calvin McDonald said, "Lululemon remains in the early innings of our growth story." Lululemon stock has gained more than 500% over the past five years, and investors can still buy in now for high gains.
