With the market drop, many stocks are reaching prices that haven't been seen for some time. This fall is despite many of these companies making monumental business gains over the past couple of years. Three no-brainer stocks I'm buying right now are Alphabet (GOOG -1.31%) (GOOGL -1.42%), Shopify (SHOP 0.92%), and MercadoLibre (MELI -0.81%).
Each stock has a unique set of circumstances that got them to this point, but none of the circumstances will impede the businesses from growing over the next five years. As a long-term investor, I'm less concerned about what the market thinks now and more excited about what lies ahead. With Alphabet, Shopify, and MercadoLibre stocks trading down 26.4%, 76.4%, and 58.5%, respectively, from their all-time highs, today presents a great long-term buying opportunity.
With Alphabet, the primary concern is a recession occurring in the U.S. It derives 80% of revenue from ad-based platforms (Google and YouTube), and advertisement spending is usually cut during recessionary times. This concentration has scared many investors into selling Alphabet's stock, even though the economy is still chugging along.
Regardless of whether a recession happens, Alphabet will be a stronger company five years into the future. It's growing revenue year over year at a 23% clip and has an operating margin of 30%. As a result, Alphabet will produce increasingly greater cash flows because of solid growth and healthy margins, adding to its already massive $134 billion cash stockpile.
Alphabet's management uses its cash flows to repurchase shares. Fewer shares mean higher earnings per share, which drops the denominator of its price-to-earnings (PE) ratio. If its valuation stays constant, the stock price must rise to offset the rising earnings.
When the stock is undervalued, management's repurchasing program can purchase shares at a better value, which is happening right now.
Trading at a mere 21 times earnings, Alphabet is cheaply valued. Alphabet is a fantastic buy today with a strong and growing business and a low valuation.
Shopify's tools allow businesses of all sizes to take their operations online. Its business saw a massive boom during the pandemic but has since tapered off. This slowdown has investors running for the hills.
From Q1 2020 to Q1 2022, revenue has grown at a 60% annual rate, yet the stock price has fallen below its pre-pandemic price. This price makes little sense, and investors would be wise to scoop up this stock before it rebounds. Management expects its growth to be higher in the second half of the year, so Shopify's recovery may come quickly.
However, with the stock down nearly 80% from its all-time high, it would have to rise nearly four times in value to recover its previous high. It may take a while to set a new record, but it's too cheap to ignore, with Shopify valued at under 10 times sales. Over the past five years, Shopify never traded below 12 times sales.
It's hard to get off Shopify's platform once a business starts, so it will continue seeing growth as long as e-commerce becomes more popular. The odds of consumers shopping online less in the next five years are low, so Shopify will remain a strong business.
MercadoLibre is an absolute powerhouse of a business. The leading e-commerce provider in Latin America also has fintech, consumer credit, and shipping logistics wings. Compared to Q1 2021, which saw 158% revenue growth, Q1 2022 was still excellent with 67% year-over-year growth.
Even more impressive was its fintech division, which saw 113% growth to $971 million in the quarter. The commerce division was less dominant but still saw its net revenue rise 44% to $1.3 billion. However, with a population of more than 600 million and an e-commerce penetration rate of 4.9%, MercadoLibre is far from fully penetrating its market opportunity in Latin America.
However, with MercadoLibre's valuation, investors might assume the business is shrinking. MercadoLibre's price-to-sales ratio (PS) is just under five; it hasn't been under six in the last decade. On average, it trades around 10 times sales, so the stock has a lot of upside even if it just returns to its typical valuation.
The last time MercadoLibre traded for under five times sales was from November 2008 to April 2009, the very bottom of the Great Recession. MercadoLibre isn't facing nearly the challenges it did when the entire financial system was on the brink of collapsing, even though the stock's valuation indicates that.
MercadoLibre has a long way to go before its vision is complete; investors should use the stock's weakness to pick up some shares.
All three companies are cheaply valued, but this can't be the sole reason for purchasing a stock. Investors must examine the businesses. If you can find a cheap stock and a great business, you may have identified an excellent investment. I believe these three stocks fit that description.