It can be nerve-wracking to buy a crashing stock -- no one wants to see their portfolio incur losses. But if you're willing to buy and hold for several years, then the payoff could be worth it in the end.
Three stocks that I'm watching closely right now that have the potential to soar in the years ahead include Canopy Growth (CGC 20.65%), Upstart Holdings (UPST -0.58%), and Netflix (NFLX -0.51%). Year-to-date, all three have fallen by more than 35% while the S&P 500 has only declined by 10%. And if they continue to drop, these could be among the best growth stocks to buy.
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1. Canopy Growth
Canopy Growth might require the most patience out of all three stocks listed here. The business hasn't been generating much growth of late, and it's been difficult for it to avoid incurring hundreds of millions of dollars worth of losses. The Canadian-based pot producer has incurred net losses totaling CA$428 million over the trailing 12 months. And net sales of CA$141 million for the last three months of 2021 were down 8% from the prior-year period. This is definitely not what you'd expect from a growth stock.
But the potential is in what lies ahead for the business. It's arguably the best-positioned Canadian company for expansion into the U.S. market, as it has multiple deals waiting in the wings that it can't close on until the U.S. legalizes marijuana. It agreed to acquire multi-state marijuana company Acreage Holdings more than three years ago, and it also has a deal in place with edibles maker Wana Brands. It also has a key investor, Constellation Brands, which has a 38.6% stake in the business and gave the pot producer billions in cash.
Without its partnerships, and especially if Canopy Growth didn't have Constellation Brands backing it, I would hesitate to say that it is worth hanging on to. But with more than CA$1.4 billion on its books in cash and short-term investments, Canopy Growth is well-funded right now, and just needs to be able to pull the trigger on the deals it has in place to really take off. The problem is it could take years before legalization in the U.S. takes place.
In the meantime, the stock continues to fall, and is now trading at prices investors haven't seen since 2017. It arguably could be a good buy even now given the potential the pot stock has to be a dominant force in the industry at some point this decade. Investors were at one point trading more than 100 times revenue for the stock -- and now it's at a price-to-sales ratio of less than five. Investors should keep an eye on this one, because years from now this could look to be a bargain price.
2. Upstart Holdings
If a recession is around the corner, it's going to be more important than ever for lenders to be more particular about who they issue loans to. And Upstart Holdings could play a pivotal role in that. The business goes deeper in analyzing an individual's risk than your typical bank does by analyzing more than 1,000 data points and using artificial intelligence to help make the underwriting process smoother. It also claims that its model results in 75% fewer defaults when using the same approval rate as the large U.S. banks.
Upstart has been a growth beast, reporting revenue of $848.6 million in 2021 which grew by an impressive 264% year-over-year. And on top of that, the company also posted a profit of $135.4 million, which was 16% of the top line and 23 times the $6 million profit it generated a year earlier.
The company has been growing at a fast rate, and the excitement has led to a volatile stock that has quickly gone from boom to bust. From highs of more than $400 that it reached last year, it's now trading at around $80, bouncing off a recent 52-week low of $72.50. Its price-to-earnings multiple of 56 is steep by most standards (that puts it at a higher premium than growth giant Amazon, which trades at a P/E of 45), and that's the key reason I'd hold back on buying the stock just yet. But it's definitely one investors should watch, because if there's a further decline after the company reports earnings next month, it could be too attractive to pass on this promising fintech stock.
3. Netflix
Netflix already suffered a massive post-earnings crash. Trading at around $210 a share, it hasn't been this cheap since early 2018. There's no other way to categorize the stock's recent crash as anything but a massive overreaction. The company did suffer a 200k decline in subscribers during the period ending March 31, but Netflix notes that winding down operations in Russia (due to the war in Ukraine) had an adverse 700k impact on paid net additions, which otherwise would have been positive. However, the company projects that next quarter its net additions could be down again, this time by as much as 2 million subscribers.
But over the long term, the growth opportunities aren't disappearing for the streaming company. At over 222 million households using its service, Netflix estimates that through sharing, another 100 million are also using the streaming site without paying for it. Netflix could potentially capture more revenue and subscribers by cracking down on account sharing, in what it describes a "large short-to-mid-term opportunity." And investors shouldn't neglect that despite the drop in subscribers this past quarter, the company still reported $7.9 billion in quarterly revenue, which was up 10% year-over-year.
At a P/E ratio of just 19, Netflix looks like a smoking-hot bargain today; a year ago, it was at a multiple of more than 60. The stock's already arguably a hot buy today, and the only reason to wait is for the bleeding and the sell-off to end. Once it does, investors shouldn't wait too long, as this may be one of the best growth stocks to load up on for the long haul.
