Investing based on a meme or short-term trend can be dangerous because what's hot today may fall out of favor in a week or a month. The safer, more stable approach is to invest for the long haul and simply buy and hold. It's not an exciting strategy, but it's one that works, and it doesn't require staying on top of the latest hype.
Although the stock market appears to be volatile right now and the S&P 500 has fallen 5% year to date, this could be an ideal time to become a long-term investor for these two reasons.
Image source: Getty Images.
1. Valuations are declining, increasing the odds for long-term gains
Buying shares of companies today while share prices are down can be a way to set yourself up for profits in the long haul. A stock like Teladoc Health (TDOC -2.40%), for example, which has fallen 22% in 2022 and more than 60% in the past 12 months, can make for a promising long-term investment.
Although the stock performance might suggest that the healthcare company is in bad shape, that's hardly the case. In the trailing 12 months, Teladoc has reported free cash flow of $130 million, and it consistently generates strong gross margins of about 68%.
And while Teladoc isn't yet profitable, its losses have been shrinking, so it should be only a matter of time before it gets into the black, given its solid margins and impressive growth. This year, the telehealth company expects to generate $2.55 billion to $2.65 billion in sales, which would translate into growth of between 25% and 30%.
At a price-to-sales ratio of less than 6, the premium investors are paying for the stock hasn't been this low in years, as seen in the chart.
TDOC PS Ratio data by YCharts
Teladoc is merely one example -- there are other growth stocks that are in similar positions.
2. It's now easier to spot which companies did well just because of the pandemic
One of the criticisms about Teladoc -- and a likely reason for its decline in value -- may be due to the assumption that this is only a business that can do well amid the pandemic. But there's been enough time since the initial wave of lockdowns to separate those companies that did well primarily because of the pandemic and those that are still doing well. Teladoc falls into the latter category.
Not only has the company's revenue been increasing each quarter, but the number of virtual visits it has reported have also been rising, even as concerns relating to the pandemic have been subsiding.
Data source: Teladoc.
And industry estimates confirm that the industry is growing, not only amid the pandemic. According to Grand View Research, the telehealth market will be worth more than $787 billion by 2028, and it will expand at a compound annual growth rate of 36.5% until then. That makes investing in Teladoc, a leader in the industry, an attractive long-term investment, especially with its valuation declining over the past year.
Now contrast this to a COVID-19 testing company like Quidel, which has seen significant volatility over the past year because of fluctuations in the number of coronavirus tests administered.
QDEL Revenue (Quarterly) data by YCharts
The range in quarterly revenue has been astounding over the past two years, from a low of $152.2 million to a high of $809.2 million. You can track when concerns around COVID-19 were highest, because that was when testing volumes were increasing versus when they started to subside.
Buying long term is safe, when picking quality stocks
The pandemic isn't over just yet, but there are enough data points at this stage to see which companies look to be the real deal (Teladoc) and which ones might struggle in a post-COVID world (Quidel). Extreme volatility in sales or profitability can lead to unpredictable gains.
Although growth investors have been aggressively selling Teladoc, the business's fundamentals look strong, and it's in an emerging industry. It's an example of a solid, long-term investment that should pay off in years to come. Focusing on today and just the immediate weeks ahead would overlook the bigger picture.
And that's why committing to being a long-term investor today can set you up for significant gains later on, because there are some incredible deals out there right now.
