Things have been nearly perfect for Wall Street and the investment community of late -- perhaps a bit too perfect.
Since the benchmark S&P 500 (^GSPC -1.03%) bottomed out in March 2020, the index has more than doubled in value. It's the strongest bounce back from a bear-market bottom in the S&P 500's long history. Yet history also shows that stock market crashes and corrections are a common occurrence and the price to be paid for taking part in one of the greatest wealth creators on the planet.
Stock market crashes and corrections are a common occurrence
Data from market analytics company Yardeni Research shows that the S&P 500 has undergone 38 double-digit percentage moves lower since the beginning of 1950. This works out to a notable decline, on average, every 1.87 years. Even though Wall Street doesn't adhere to averages, it does demonstrate just how frequent steep corrections and crashes have been throughout history.
Speaking of history, Wall Street has consistently shown for decades that bouncing back from a bear-market bottom is a process. Following each of the previous eight bear market troughs, the S&P 500 shed at least 10% of its value on one or two occasions within 36 months. We're currently more than 19 months removed from the pandemic bottom and have yet to endure a double-digit decline.
History has also been quite clear what happens to equities when valuations get overly extended to the upside. On Nov. 1, the S&P 500's Shiller price-to-earnings (P/E) ratio closed above 39. The Shiller P/E examines inflation-adjusted earnings over the past 10 years. In the four previous instances where the S&P 500's Shiller P/E surpassed 30, dating back to 1870, the index has subsequently lost at least 20% of its value.
The point being that the likelihood of a crash or correction is growing. We may not know precisely when it's going to happen, how steep the decline will be, or how long it'll last, but this data certainly offers credence to the idea that a double-digit percentage drop may be coming.
Market declines are a surefire opportunity for patient investors
The good news for long-term investors is that every single double-digit percentage decline in the stock market throughout history has proved to be a buying opportunity. These drops have been especially lucrative opportunities to buy discounted growth stocks, which tend to get hit hard during crashes and corrections.
If a stock market crash or steep correction does rear its head, the following three discounted growth stocks would make for perfect buys.
The first discounted growth stock investors can confidently scoop up during a crash or correction is technology-driven real estate company Redfin (RDFN -3.37%).
The biggest prevailing critique of Redfin is that the company has benefited from historically low mortgage rates, which are bound to head higher over time. History has shown that higher mortgage rates tend to suppress homebuying activity, which would, in turn, slow Redfin's rapid growth rate. While this assessment has often been spot on for traditional real estate companies, Redfin is far from traditional.
When a buyer or seller seeks a real estate professional, they're often going to pay a listing fee/commission ranging between 2.5% and 3%. However, with Redfin, the listing fee is either 1% or 1.5%, depending on how much prior business was done with the company. According to the National Association of Realtors, the median existing home sold in September 2021 had a sales price of $352,800. This means sellers choosing Redfin may be able to save a median of $7,000. That's not pocket change, and it demonstrates Redfin's willingness to save its clients money.
Beyond just undercutting traditional real estate firms on price, Redfin is relying on its higher-margin personalized services to woo new clients. For instance, the company's Concierge service instructs sellers on staging and upgrades that'll help them maximize the sales price of their home. There's also the RedfinNow service, which has been expanded to a number of new cities. RedfinNow acquires homes from sellers with cash, thereby removing the hassle and haggling that typically accompanies selling a home.
Since the end of 2015, Redfin's share of U.S. existing home sales has consistently expanded from 0.44% to 1.18%, and it has plenty of room to grow. If a big dip were to arise in the broader market, it'd be the perfect stock to scoop up.
Pinterest has taken a lot of heat from investors over the past three months. It disappointed with a sequential quarterly decline of 24 million monthly active users in the second quarter, and was the subject of short-lived rumors that it would be acquired by PayPal. PayPal has since denied any interest in buying Pinterest at this time. This confluence of factors has halved Pinterest from its all-time high.
While there's no sugarcoating that things haven't been perfect for Pinterest, the pessimists are equally overlooking a number of important metrics. For instance, Pinterest's three-year monthly active user (MAU) growth trajectory is still well within its normal range, even with higher vaccination rates lowering net MAUs in Q2 and encouraging people to get out of their homes.
What's even more important is that Pinterest's monetization efforts continue to be robust. Despite growing its total MAUs by "only" 9% in the June-ended quarter, average revenue per user (ARPU) increased by 89% globally and 163% internationally from the prior-year period. This demonstrates that merchants are more than willing to pay big bucks to reach Pinterest's potentially motivated shoppers.
Furthermore, don't overlook how transparent Pinterest is, relative to other social media platforms. Its entire premise is built on users sharing the things, places, and services that interest them. This allows merchants to target their advertising dollars in a more effective way than virtually any other social media site. It also positions Pinterest to become an e-commerce force to be reckoned with by the end of the decade.
Weakness in Pinterest's shares during a crash would make for an ideal buying opportunity.
A third discounted growth stock begging to be bought during a crash or steep correction is telemedicine kingpin Teladoc Health (TDOC -5.33%).
The knock against Teladoc is similar to that of Redfin. In other words, it was in the right place at the right time when the pandemic struck and benefited immensely from a massive uptick in virtual visits. Pessimists believe virtual visit growth will slow considerably as vaccination rates pick up and life returns to some semblance of normal.
The problem with this take is that it completely ignores how Teladoc is changing the healthcare treatment landscape. Providing virtual visit channels is more convenient for patients, and can be especially helpful for physicians when attempting to keep tabs on chronic-care patients. This ease-of-access should ultimately improve patient outcomes and reduce out-of-pocket costs for health insurers. In short, health insurers are going to be all-in on telemedicine applications for a long time to come.
Teladoc also improved its long-term growth outlook by acquiring applied health signals company Livongo Health a year ago. Livongo utilizes artificial intelligence to send tips to chronic care members to help them lead healthier lives. As of the end of September, Livongo had 725,000 members enrolled. As Livongo expands its services beyond diabetes patients to those with hypertension and weight management control issues, its pool of potential members will skyrocket.
Investors should note, as well, that Teladoc Health's operating results will vastly improve in 2022. Costs tied to the Livongo acquisition have substantially widened its losses in 2021. But these one-time expenses won't be around next year.
If a crash occurs, Teladoc Health would make for a smart buy.