The next bear market is already upon us (or soon will be). The tech-heavy Nasdaq Composite is down 28% year to date, while the S&P 500 index is down 17.3%. A bear market is generally described as a situation where the market falls by 20% or more from its previous high for a sustained period. So, depending on which market you follow, we are already there or we are flirting with it.
Keep in mind that these downturns occur more often than you might think. Since 1945, there have been 14 bear markets, or once every five years on average, according to research from Hartford Funds. Because the stock market has delivered an average annual return of about 10% over the last 50 years and there have been many sell-offs along the way, these declines create great opportunities to buy great companies at heavily discounted valuations that can improve your long-term returns significantly.
If you are looking to buy stocks in a fire sale, here are three stocks with bright futures to consider.
Image source: Getty Images.
1. Shopify
Global e-commerce is projected to reach $7.4 trillion by 2025, up from $4.9 trillion in 2021, according to eMarketer. But you wouldn't know there is a huge long-term opportunity for Shopify (SHOP +2.29%) judging by its stock performance. Year to date, share prices of this leading online commerce solutions provider have dropped 76.4%.
NASDAQ: SHOP
Key Data Points
This is the same company that Wall Street thought was worth $200 billion in market value six months ago but now thinks it's only worth $45 billion. Don't be fooled by the market's bad moods. The intrinsic value of a company doesn't change that much in a short amount of time. Looking ahead to the next few decades of growth, Shopify's market cap may far exceed $200 billion, considering the size of the global e-commerce market and the value Shopify provides companies of all sizes.
Shopify serves businesses large and small across more than 175 countries. Gross merchandise volume totaled $175 billion in 2021, up from $119 billion in 2020. The business is growing quite fast, but the great thing about Shopify is that it empowers businesses of all sizes to stay competitive in the shifting sands of e-commerce.
In 2021, Shopify generated $1.3 billion in revenue from subscriptions, but revenue from merchant solutions, including payment processing fees, shipping, and other services, totaled $3.3 billion and is growing much faster than subscriptions. Merchants go to Shopify to set up an online store or solve some other problem, but once on the platform, they realize Shopify can help them in many ways. Over time, as merchants grow their businesses, Shopify generates higher revenue from payment processing fees and other services. In this way, Shopify shares in merchants' success.
The market is worried about lower growth in the near term over economic headwinds. Shopify saw its subscription revenue grow only 8% year over year in the first quarter. But an investment in Shopify is a bet on the long-term growth of e-commerce. Management said in the first-quarter earnings report that growth should accelerate toward the end of 2022, which could serve as a catalyst to push the stock higher.
2. Lululemon Athletica
Shares of Lululemon Athletica (LULU 0.12%) are down 34% year to date. This emerging brand operates with a growing tailwind in the global sports apparel market. Research from Statista estimates this market will grow from $192 billion in 2021 to $267 billion by 2028.
Lululemon could be the best stock to ride that increase. A $10,000 investment in the stock five years ago would already be worth $52,750.
Unlike Nike and other top brands, Lululemon doesn't do a lot of TV commercials. The company was founded in 1998 with a retail space in a local yoga studio in Vancouver, Canada. Through word-of-mouth and grassroots initiatives, Lululemon has grown into a $6.3 billion annual-revenue-generating business. This means Lululemon attracts customers not with clever marketing but with a quality product that people want to buy.
Lululemon clearly has a successful formula for how to selectively open new stores and expand, but investors should be excited about the opportunities still ahead. As of Jan. 30, it had 574 stores open worldwide, with only 187 stores outside of North America.
Another attractive aspect of Lululemon is its growing e-commerce business. During fiscal 2020 (which ended in January), direct-to-consumer revenue made up 52% of sales and kept the business growing while stores were closed or operating at reduced capacity.
Lululemon updated investors in April with a new goal to double revenue to $12.5 billion by 2026. The stock could also double again over that time frame, especially off the recent dip in the share price.
Image source: Nvidia.
3. Nvidia
Another growth stock getting shellacked this year is Nvidia (NVDA 3.44%), the fast-growing supplier of graphics processing units (GPUs). Its shares are off 51.6% from their all-time high in late 2021. While Wall Street analysts caution investors about a potential slowdown in growth, long-term investors should think about adding this tech winner to their nest egg.
The 50% haircut already prices in bad news in the short term. The stock could still hit new lows if the market continues to fall, but at a price-to-earnings ratio of 44, there is solid value underneath the shares right now.
NASDAQ: NVDA
Key Data Points
Nvidia has been experiencing tremendous demand for high-performance processors and advanced computing systems lately. In the fiscal 2022 fourth quarter ending Jan. 30, revenue grew 53% year over year, driven by a 37% increase in gaming GPUs and a 71% increase in data center demand.
Obviously, a recession could lower demand for pricey graphics cards. Many people who play video games buy Nvidia's GeForce GPUs to play the latest games at the highest graphics settings. A typical GPU can cost hundreds of dollars, which is not going to be a priority for people in a recession. Gaming made up 44% of total revenue in the most recent quarter and was Nvidia's largest segment, so a slowdown here would hurt the company.
Regardless of what happens in 2022, Nvidia could grow substantially over the next 20 years. With its leadership position in GPUs, it is facilitating the most important trends in technology, such as artificial-intelligence computing, 3D design, robotics, self-driving cars, medical imaging, and more. These are trends impacting every sector of the economy. Management estimates the company's available market opportunity is only 1% of the industries they currently serve, which translates to hundreds of billions of dollars in potential revenue.
This is a top stock to consider buying on dips and holding for a lifetime. Your retirement account will thank you.
