Whether you're a new or tenured investor, the stock market has sent a clear message over the past four months that corrections are an inevitable part of the investing cycle.
Since the year began, the benchmark S&P 500 and iconic Dow Jones Industrial Average entered correction territory with respective declines of at least 10%. Things have been even worse for the growth-driven Nasdaq Composite (^IXIC -0.64%), which has shed 23% since hitting its all-time closing high in November. This officially puts the Nasdaq in its first bear market since the pandemic meltdown in March 2020.
Although big declines in the major indexes can be scary at times, history has shown that they're the perfect time to put your money to work. Every major index, including the Nasdaq Composite, eventually shrugs off each and every correction.
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What's more, growth stocks can be one of the smartest places to invest your money during a correction or bear market. A Bank of America/Merrill Lynch report that examined the performance of growth stocks and value stocks over 90 years (1926-2015) found that growth stocks outperformed during recessions and periods of economic weakness.
The following three growth stocks are at least 64% below their all-time highs and are now begging to be bought at reduced levels.
Sea Limited: Down 78% from its all-time high
The first growth stock that's taken an absolute beating as the Nasdaq has swooned is Singapore-based conglomerate Sea Limited (SE -0.69%). Shares of Sea skyrocketed tenfold in just an 18-month period during the pandemic, but have gone on to lose 78% of their value since peaking in October.
Sea is facing a number of pressing questions as global inflation heats up and COVID-19 continues to wreak havoc on supply chains, especially in Asian markets. In particular, Wall Street had become accustomed to jaw-dropping sales growth over the past couple of years. Looking ahead, Sea's revenue growth is slated to slow a bit, with annual losses expected to continue for a few more years. When big market declines occur, valuation comes into focus, and companies with large annual losses, like Sea Limited, often take it on the chin.
But there's another side to this story that should excite patient growth investors. Specifically, Sea has three rapidly growing segments that can all become serious cash flow generators.
For the moment, the company's gaming division, known as Garena, is the only operating segment bringing in positive earnings before interest, taxes, depreciation, and amortization (EBITDA). Hit mobile game Free Fire helped lift the number of quarterly active users (QAUs) to 654 million as of the end of 2021. More importantly, 11.8% of these QAUs were paying to play Sea's games. The typical pay-to-play conversion ratio in mobile gaming is in the low single digits.
There's also excitement for SeaMoney, the company's digital financial services segment. Although it's still relatively new, nearly 46 million QAUs were using SeaMoney products and services, such as digital wallets, in the fourth quarter. This is an intriguing segment considering that Sea operates in a number of emerging regions where access to basic banking services can be limited.
Lastly, there's e-commerce platform Shopee, which has consistently been the most downloaded shopping app in Southeast Asia. Shopee has been picking up momentum in Brazil, too. During the fourth quarter, Shopee had $18.2 billion in gross merchandise value (GMV) traverse its network. That's more than the $10 billion in GMV recognized in all of 2018. If Sea can significantly improve e-commerce EBITDA into 2023, its share price could rebound in a big way.
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Green Thumb Industries: Down 64% from its all-time high
A second growth stock that's been absolutely pulverized and is now begging to be bought is cannabis multi-state operator (MSO) Green Thumb Industries (GTBIF -5.60%). Shares of Green Thumb have declined by 64% since hitting their intra-day high a little over a year ago.
During the first quarter of 2021, marijuana stocks were all the rage. A Democrat-led Congress, coupled with President Joe Biden taking office, made it appear likely that federal legalization, or at the very least cannabis banking reform, would become a reality. However, with COVID-19 and geopolitical issues dominating lawmakers' time, no reforms have been passed on Capitol Hill. As a result, pot stocks like Green Thumb have been taken to the woodshed.
But despite a lack of federal reforms, we've still witnessed three-quarters of all states legalize cannabis in some capacity. To add, 18 of these states have green-lit adult-use recreational consumption. The point is that individual state regulation is providing more than enough opportunity for well-funded MSOs to thrive.
Green Thumb opened its 77th operating dispensary last month and generated retail sales from 14 states in 2021. Although it does have a presence in high-dollar markets like California, the company has wisely chosen to enter a number of limited-license markets. These are states that purposely limit how many cannabis dispensary licenses are issued in total, as well as to a single business. It's a way of promoting competition and ensuring that companies like Green Thumb have a fair shot to build up their brand(s) and garner a following.
The one factor that really makes Green Thumb special is its product mix. Only around a third of the company's sales are derived from dried flower. The remainder comes from vape products, infused beverages, pre-rolls, edibles, and other derivatives. The key here is that derivatives sport higher price points and better margins. These higher margins have allowed Green Thumb to generate recurring profits while most other MSOs are still losing money.
Considering that Green Thumb Industries is expected to continue growing its sales by 20% to 25% annually, its forward-year price-to-earnings ratio of 24 makes it a bargain.
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Etsy: Down 70% from its all-time high
A third and final growth stock that's been battered by the Nasdaq bear market decline is specialty online retail platform Etsy (ETSY 0.49%). The former pandemic superstar has shed 70% of its value since hitting an all-time intra-day high five months ago.
The biggest concerns for Etsy are historically high inflation and the growing prospect of a recession in the United States. The cost for virtually everything has soared, which threatens to reduce consumer spending. That would be bad news for Etsy, which relies on merchants to boost their ad spending over time.
On the other hand, trying to time inevitable recessions in the U.S. economy is a fool's errand. History has shown that most recessions only last a few months or a couple of quarters. By comparison, periods of economic expansion are measured in years. Buying rapidly growing and innovative e-commerce players during periods of weakness and holding for years is probably going to be a smart move.
Furthermore, Etsy brings a competitive advantage to the table that should allow it to stand out. Whereas most online retail platforms target volume, Etsy's merchants are usually smaller businesses that offer unique/customized products and services that enhance consumer engagement. There's not an online retail platform that offers engagement at scale quite like Etsy.
Something else to excite long-term investors is Etsy's success in converting casual shoppers into habitual buyers. A habitual buyer is defined as a shopper who makes at least six purchases over a trailing-12-month period, with the aggregate value of those purchases hitting at least $200. Since the beginning of the pandemic, the number of habitual buyers has grown by 224%! These habitual buyers are the company's key to extracting more ad revenue out of the merchants on its platform.
Even if the U.S. enters a recession -- U.S. first-quarter gross domestic product declined by 1.4% -- Etsy is well-positioned to deliver sustainable double-digit sales growth. Based on Wall Street's consensus profit forecast (which has proved fluid in recent weeks), a share of Etsy can be picked up for just 21 times forecast earnings in 2023. That's as inexpensive as this company has ever been.
