Sell-Off? Correction? 3 Stocks to Buy That Are Already 50% Off Their Highs

Even though the S&P 500 is trading close to its all-time high, tech investors have been feeling the heat as highly valued stocks have been dragged down. As the year comes to a close, we're taking a look at some beaten-down stocks that we think the market has wrong.

Three longtime Fool contributors picked their favorite stock for 2022 that was off its high 50% or more. They came up with Chewy (CHWY 1.92%), Palantir Technologies (PLTR 0.56%), and Lemonade (LMND 1.44%). 

Image source: Getty Images.

After months on a leash, this stock could run again soon 

Will Healy (Chewy): Chewy has carved out a niche for itself in the pet supply business. This e-commerce stock has stood out over prospective competitors such as Amazon through a higher level of customer interaction. The company stands by its 100% unconditional satisfaction guarantee and offers its customer a personal touch, which has built loyalty among its customer base.

Chewy stock thrived during the pandemic, but interestingly, near-term concerns appear to hinge on the concept of pet ownership, not Chewy's performance. Having a pet became more attractive during the pandemic, according to The American Society for the Prevention of Cruelty to Animals. Consequently, investors seem worried that the end of the lockdowns would lead to less interest in pet ownership, even though the evidence suggests otherwise. Such concerns helped put Chewy in the doghouse as it dropped by more than 50% since peaking in February.

Nonetheless, investors should not expect Chewy to roll over permanently. This year, the company partnered with Trupanion to offer pet health insurance. And despite worries, Chewy also increased net sales per active customer by 15% over the last year to $419.

Given that surge, it should not surprise shareholders that the company reported over $6.5 billion in revenue for the first nine months of 2021, 27% more than in the first three quarters of 2020. This reduced the net loss in the first 39 weeks of 2021 to just over $10 million, primarily by slowing the growth in the cost of goods sold to 23%. Chewy lost close to $114 million during the same period in 2020.

For the full year, Chewy forecasts revenue at approximately $8.9 billion. If that holds, it would signify 25% higher revenue year over year. Admittedly, that also points to a fourth-quarter sales forecast of $2.42 billion at the midpoint, which would mean a more modest 18% increase.

However, thanks to that rising revenue and falling stock price, the price-to-sales (P/S) ratio now stands at 2.8. This closely approximates Chewy's sales multiple from two years ago, before the start of the pandemic. Such a P/S ratio and the prospects for further growth could make Chewy an increasingly attractive buying opportunity.

Image source: Getty Images.

Cutting-edge artificial intelligence at a discount

Danny Vena (Palantir): When the stock market swoons, it sometimes throws out the baby with the bathwater, as the old saying goes. This presents savvy investors with an opportunity to pick up shares of high-growth companies on the cheap. That is certainly the case with Palantir Technologies.

In the wake of 9/11, it became clear that the U.S. government needed a way to gather, analyze, and share siloed data trapped in aging software systems across various intelligence agencies that didn't communicate.  

Peter Thiel, one of the co-founders of PayPal Holdings, developed an elegant solution: a data mining tool that could collect information from across thousands of government databases and assemble a puzzle from pieces left by would-be terrorists. By using machine learning and other artificial intelligence (AI) algorithms, it could distinguish patterns that might otherwise go unnoticed -- and Palantir was born.

Palantir has the ability to fuse together seemingly unrelated factoids, giving intelligence officials advance notice for potential terrorist attacks. The system is able to stitch together seemingly disparate pieces of information to create a picture -- a one-way plane ticket; large, frequent withdrawals from foreign bank accounts; a rented condo; repeated calls to known terrorist safe havens; a rented truck; and the purchase of theme park tickets -- and in doing so identify a potential terrorist attack.

No longer relegated to just government agencies, Palantir's technology can be deployed by commercial enterprises to gather unstructured, siloed data across legacy systems and assemble it in one place, thereby providing keen and valuable insights -- and business is booming.

In the third quarter, total revenue grew 36% year over year, but revenue from U.S. enterprise businesses surged 103%, as Palantir's commercial customer count grew 46%. In fact, since Dec. 31, 2020, its commercial customer count has increased 135%. 

Palantir closed 54 deals worth more than $1 million, of which 33 contracts were worth $5 million, and 18 were worth $10 million or more. The company's total remaining deal value -- similar to remaining performance obligation -- climbed 50% to $3.6 billion, giving keen insight into Palantir's future prospects.

While the company isn't yet profitable, it generated operating cash flow of more than $100 million, which shows that much of the shortfall is related to non-cash expenses like depreciation.

Even more compelling was management's commentary that it expects annual revenue growth of at least 30% or more through 2025.

Yet even in light of its impressive results and stellar prospects, Palantir's stock has lost more than half its value, dragged down by the overall negative market sentiment. This gives investors the opportunity to buy into a wildly successful business at a significant discount.

Image source: Getty Images.

This insurance disruptor may be down, but it's not out

Brian Withers (Lemonade): Lemonade is disrupting the insurance industry with products that embody the company's tag line, "Instant everything. Incredible prices. Big heart." Its co-founders, Daniel Schreiber and Shai Wininger, wanted to build a different kind of insurance company. In the S-1 filing, they described it as "rebuilding insurance from the ground up on a digital substrate and an innovative business model" to make insurance "more delightful, more affordable, more precise, and more socially impactful." From its results, they seem to be doing just that.

The table below includes selected results from the latest earnings report. Not only is the company collecting 84% more premiums year over year, but its premiums per customer are also gaining ground at an impressive 26%.

Data source: Company earnings reports. QOQ = quarter over quarter. YOY = year over year. 

But what savvy investors know is that these results are based only on its renters, life, pet, and homeowners insurance. This doesn't even include anything from its entry into auto insurance. In early November, the company tiptoed into this market with the announcement of its first auto policies available in Illinois. But, a few days later, it made a massive splash with the announcement of its acquisition of Metromile in an all-stock transaction. Management has estimated that Lemonade's customers spend more than $1 billion on auto insurance products from other companies. When this deal closes in the second quarter of 2022, the 1 million-plus Lemonade customers will have access to Lemonade-branded auto policies. As a Lemonade shareholder, this is certainly well worth waiting for.

In the meantime, investors can get this innovative insurance disruptor with an impressive moat on sale. The market has bid down this insurance technology stock close to an all-time low. With the stock down over 70% from its high, those who want to get a deal on this lemon may not get it at a better price than it is today.