The market has taken a beating thus far in 2022. As of this writing, the S&P 500 has slipped 7% year to date, and many tech stocks are down significantly more than this. The market will undergo downtrends as macroeconomic conditions and investor sentiment shift, but the market has always recovered -- and it will again. The key is to differentiate quality companies whose stocks have oversold based on momentum or short-term headwinds from those with solid fundamentals.
The most recent significant downturns occurred in 2018 and, of course, in March 2020 when the pandemic hit the U.S. During each period, investors dumped quality companies and those with subpar results alike. Few predicted that the March 2020 crash would be the buying opportunity of a generation as the world's economies were shuttering. Some did, and those cunning investors were able to pick up great stocks at steep discounts to make terrific returns. With this in mind, let's explore some of the names on sale now.
Image source: Getty Images.
1. Amazon
Amazon (AMZN -1.64%) is down more than 14% year to date. The company has been hit with a double whammy of short-term headwinds and the general market decline.
First, COVID-19 has caused supply chain headaches. Next, the tight labor market in the U.S. and the need to manage a mammoth workforce during a global pandemic have added billions of dollars in expenses to the bottom line. Amazon operates under three segments, North America, international, and Amazon Web Services (AWS). Because of the additional costs, the North America and international segments swung to a combined net operating loss in the third quarter of 2021. This is despite significant gains in net sales.
The good news is twofold. One, these headwinds, while frustrating, are only temporary. Demand remains strong, and the supply chain will iron out as COVID-19 loses intensity. Amazon's workforce investments should also pay off in the future. Second, the AWS segment has been on fire. Sales were up 36% in Q3 2021 over the same period in 2020. Operating income for AWS was up 33% over this period, and the operating margin was a robust 30% in Q3 2021. It is vitally important that Amazon has this thriving segment to power it through the temporary headwinds being experienced in e-commerce. Look for this momentum in AWS to continue when fourth-quarter 2021 earnings are reported.
For long-term investors, buying while the stock takes a breather could pay off handsomely.
2. The Trade Desk
The Trade Desk's (TTD 3.35%) stock has been decimated this year, losing more than 30% of its value year to date. Is this sell-off overdone? It certainly appears so. The company's price-to-sales (P/S) ratio now stands at just over 26 and just over 18 on a forward basis. This is the lowest P/S ratio of the past 18 months; however, the underlying business is thriving.
TTD PS Ratio data by YCharts
The Trade Desk is growing rapidly in the emerging digital advertising industry. The company operates on the demand side of the business by providing its platform to advertisers and their agencies who seek to advertise on various mediums, including connected television (CTV), mobile, video, display, and social media. The Trade Desk's focus on CTV has allowed it to reach 120 million CTV devices in the U.S. alone. It doesn't hurt that customers love the product, as evidenced by The Trade Desk's 95% retention rate over the past seven years.
Sales for the first nine months of 2021 easily outpaced 2020, growing by 55%. The Trade Desk is also a profitable enterprise. Many growing tech stocks are not. The company produced $130 million in net income through Q3 2021 and achieved a net margin of 16%. This is extremely impressive for a still-growing business and bodes well for the future of the company and its stock price.
3. RH
Shares of RH (RH 1.32%), formerly Restoration Hardware, have fallen 24% so far in 2022. RH is a luxury furniture seller that showcases its designs in high-end galleries throughout the U.S. RH is in a similar position to Amazon in dealing with supply chain difficulties. However, the company has continued to post tremendous results. The third quarter saw sales increase 19% over the prior year and break $1 billion in the quarter. Even better, the company is becoming more profitable while growing sales. The operating margin in Q3 came in at 27%, a very impressive margin for a physical product-based company.
RH has big plans for expansion to Europe. These plans have been pushed back by the pandemic, but management is insistent that they will proceed. The company is set to begin this expansion in the U.K. and then follow with galleries in Paris, Munich, and Dusseldorf. Overall, RH believes it has a global addressable market of $20 billion to $25 billion. Management has a history of success and has guided the company admirably throughout the pandemic. The stock now trades at a price-to-earnings (P/E) ratio lower than at any time since the pandemic crash. This could offer long-term investors an attractive entry point.
RH PE Ratio data by YCharts
Is now the time to buy?
There is no telling when the market correction will end. Just as valuations become stretched during a bullish market run, many stocks overcorrect to the downside when sentiment turns bearish. With this in mind, investors should look for high-quality businesses trading at a discount. The stocks mentioned above have solid core businesses and, despite short-term headwinds, very bright futures for investors with a long time horizon.
