We're only just beginning the second quarter and it's already been a wild year for investors.
The S&P 500 roared into the new year at all-time highs, but by March the broad-market index had dipped into a correction as concerns like the war in Ukraine, record inflation, and rising interest rates rattled investors. But since bottoming on March 8, the index has rallied more than 10%, and is now approaching all-time highs again.
At times like these, the only thing that's certain in the market seems to be uncertainty. That's no reason to panic, however.
A real wealth creator
Matt DiLallo (Realty Income): Few companies embody their name quite like Realty Income. The real estate investment trust (REIT) aims to deliver dependable monthly dividends that steadily rise over time. That's exactly what it has done throughout its history.
Realty Income recently announced its 115th dividend increase since its initial public offering (IPO) in 1994, and its 98th consecutive quarterly increase. Overall, it has given investors a raise for 27 straight years -- qualifying it as a Dividend Aristocrat -- while growing the payout at a 4.4% compound annual rate.
This steady dividend growth has created a lot of value for shareholders. Since its IPO, Realty Income has delivered a 15.5% compound annual total return.
Realty Income should be able to continue delivering a steadily growing income stream in the coming years. The REIT has one of the best balance sheets in the sector and a reasonable dividend payout ratio. That gives it the financial capacity to continue buying income-producing real estate, and it sees an enormous opportunity to continue growing. There's an estimated $12 trillion of owner-occupied commercial real estate in the U.S. and Europe, providing it with a massive acquisition opportunity set.
Realty Income's ability to continue increasing its already attractive 4%-yielding dividend should help it deliver shareholder value. Add in its below-average volatility, and it's a great stock for investors to consider adding to their portfolio this month.
An unconventional AI bet
Chris Neiger (Upstart Holdings): Artificial intelligence (AI) gets a lot of attention these days, but one AI angle that's just a little bit off the beaten path is Upstart Holdings and its loan origination business.
The company uses AI to streamline the loan application process for customers, with more than 70% of loans approved entirely through its automated system. And it's not just efficient. Loans originated on Upstart's platform result in 75% fewer defaults than those made through traditional lenders, and its personal loans charge rates that are 10% lower for customers.
Loan origination isn't exactly an exciting business. But you know what is? The potential for Upstart to tap into the $727 billion auto lending market and the $4.6 trillion mortgage market. The company is just getting started in both of these spaces, and it'll build on the success it's already had with personal loans.
The good news for investors is that Upstart doesn't just have a lot of potential -- it's already running a successful business. Total revenue spiked 252% in the fourth quarter (reported on Feb. 15), and operating income soared more than 5X to $60.4 million.
And the company looks even more attractive when you consider that 94% of its revenue comes from banks and lending institutions, which means the company doesn't have substantial exposure to risky borrowers.
Upstart's stock could experience some volatility in the short term, since growth stocks are suffering in the market right now. But with the company's stock currently down, snatching up some shares of this company could prove to be a wise bet over the next few years.
A media-streaming winner in Wall Street's bargain bin
The stock is trading 74% below last summer's all-time highs as of this writing. I understand why value investors are bundling this ticker with risky highfliers in the recent growth stock sell-off, since it changes hands for a princely 72 times trailing earnings and 92 times free cash flows, even now. However, I don't get why Roku's correction was much sharper than average. The tech-heavy Nasdaq Composite (^IXIC -0.09%) index has only retreated 11% from its December highs, by comparison.
As the worldwide leader in streaming video platforms, this company wins as long as the digital media sector is growing. Roku investors don't care which streaming service might be winning or losing the channel wars, because all those rivals rely on Roku's tried-and-true hardware and software solutions for putting their content in front of consumers. Furthermore, Roku is introducing new revenue streams such as its own lineup of original shows, on-screen shopping tools, and more.
We ain't seen nothing yet. Roku is poised to bounce back from this mysterious sell-off with a vengeance. It's one of my strongest investing ideas for the long haul, and like I said earlier, the stock looks affordable right now.
A social marketplace that's been left for dead
Tim Green (Poshmark): If you have a bunch of clothes in your closet you want to sell, and you don't want a consignment shop to take a cut of 50% or more, Poshmark is the solution. Poshmark's third-party resale marketplace not only connects sellers with 7.6 million active buyers, but it also makes the process fun by infusing social aspects. Through likes, comments, and shares, sellers can build a following and a personal brand.
Poshmark the company is doing just fine. $1.8 billion of merchandise flowed through its platform last year, and the company generated revenue of $326 million. Those numbers were up 27% and 25%, respectively, from 2020. Poshmark isn't profitable, partly because it's been ramping up marketing to boost growth, but it is producing positive free cash flow.
Poshmark the stock is a very different story. Shares are down a whopping 87% from their all-time high, which they reached soon after the company's IPO in early 2021. Poshmark is now valued at just over $1 billion.
It's certainly true that growth has slowed down, and that the bottom line is taking a hit as spending has ramped up. But the market Poshmark is going after is large – the resale market is expected to more than triple in size by 2025 to $47 billion. Poshmark isn't the only player, but it's big enough that network effects give it a significant advantage. Poshmark's millions of buyers draw in sellers, and those new sellers bulk up the selection and draw in more buyers. On and on it goes.
Poshmark was founded in 2011, so it hasn't lived through a non-pandemic recession. But given that the platform is geared toward used clothes and good deals, it stands to reason that the company will hold up if the economy takes a turn for the worse. Poshmark has nearly $600 million in cash and no debt, so it should be able to weather just about any storm.
Investing in Poshmark will require some patience, but with a beaten-down valuation, a rock-solid balance sheet, and a massive long-term growth opportunity, the stock has a lot going for it.
A growth star trading at a discount
However, cloud identity specialist Okta has grown steadily, pandemic or not, since its 2017 IPO, with organic revenue growth hovering around 40%. Nonetheless, the stock has fallen in recent months on the broader sector sell-off. It took a further hit after it revealed that one of its third-party engineers had been hacked, though the company said the incident was not material.
As a result, the stock is the cheapest it's been since 2018, trading at a price-to-sales ratio of 18, or 14 based on this year's expected revenue. While that might not sound cheap, Okta provides an essential service for businesses, and it's the fast-growing leader in an addressable market that it now values at $80 billion. The hack may have wounded the company's reputation, but it doesn't seem like a long-term threat to Okta, and the sell-off sets up a short-term buying opportunity. Okta should be able to achieve its target of at least $4 billion in revenue and a 20% free cash flow margin by fiscal 2026, implying it will grow revenue by at least 35% annually and generate free cash flow of at least $800 million.
If the company can reach that goal and continue penetrating the large market in front of it, buying now will pay off down the road.