After year a like this, who couldn't use a little summer vacation?
Around Memorial Day, the S&P 500 was down 13% for the year. Concerns about inflation, rising interest rates, the war in Ukraine, and supply chain snags have all combined to sink stocks as investors prepare for a slowing economy.
Though the market has rallied over the last few days to bring the broad-market index off of its recent lows, the volatility is likely to continue. Though uncertain times might seem scary, they are often good buying opportunities for long-term investors. Keep reading to see why Roku (ROKU 2.66%), Redfin (RDFN 2.40%), Meritage Homes (MTH 2.63%), Graftech International (EAF 1.55%), and MercadoLibre (MELI -0.81%) are all ripe for the picking in June.
Don't change the channel on this stock just yet
Chris Neiger (Roku): Investing in a tech stock in this market feels like a decision that could backfire, but there are more than a few good reasons why Roku's video streaming platform could end up being a fantastic long-term play. Here are three.
First, the company's number of active accounts is impressive and continues to grow. In Roku's first quarter, the company had 61.3 million active accounts -- a 14% increase from the year-ago quarter.
Some of that growth came as people were spending lots of time at home last year, but it's not just the company's accounts that are increasing -- Roku users are also spending tons of time on the platform even as most COVID-19 restrictions have tapered off.
Which leads to the second reason Roku looks like a good bet: Its engagement is higher than ever. Roku says that in the first quarter of 2022 its users streamed nearly 21 billion hours of programming, up 14% from the year-ago quarter. That keeps Roku as the No. 1 TV streaming platform in the U.S., Canada, and Mexico and indicates that even as things have opened back up, Roku users are still tuning in.
So Roku has lots of active accounts with people who are very engaged with the platform, but the icing on the cake here is that all of those accounts and TV viewing are also translating into impressive revenue gains.
Roku's average revenue per user (ARPU) grew by an impressive 34% in the first quarter to $42.91. That increase helped boost net sales by 28% year over year and shows that the company knows how to convert users into paying customers.
In normal times, all of Roku's growth would have likely translated into a rising share price. But these aren't normal times. Rising inflation and recession worries are taking the steam out of stocks right now. But smart investors know that when others are panicking in the market, it's a good time to snatch up great companies at a discount -- and Roku fits the bill.
A true disruptor at a fire-sale valuation
Matt Frankel, CFP (Redfin): Redfin isn't exactly a low-risk stock, but with shares 85% below their 52-week high, it could be worth a closer look for patient, long-term investors.
Redfin's core business is its tech-focused real estate brokerage. There are other companies attempting to use technology to disrupt the business, but Redfin is the only one that seems interested in disrupting the antiquated commission structure of real estate sales. If you sell a home with a Redfin agent, you'll pay just 1.5% (or less) -- half of the industry standard 3% rate. With home prices rising rapidly, an extra 1.5% in sellers' pockets can be a huge advantage. The brokerage business continues to gain share and currently has 1.18% of all existing home sales in the United States.
In addition to the brokerage business, Redfin recently acquired Bay Equity Home Loans, which offers title and settlement services and immediately makes Redfin a serious player in the mortgage industry. And through its RedfinNow iBuying business, Redfin directly bought and resold more than 1,200 homes in 2021. Finally, Redfin recently took a major step into the rental side of real estate, acquiring RentPath out of bankruptcy, giving it the extremely valuable Apartment Guide and Rent.com brands and capabilities to bring rental searches to its own platform.
Redfin aims to not only evolve into a one-stop shop for real estate, but one where consumers save time and money over the legacy players in the space. With a market cap of less than $1.1 billion (less than half of Redfin's trailing-12-month sales), now could be a good time for risk-tolerant investors to add shares.
A deep value play on the real housing crisis
Skyrocketing interest rates, home prices, and the cost of nearly everything else have spooked investors. Fears of a housing crisis are rampant.
But investors are focusing the wrong numbers. The real housing crisis is a massive lack of supply. Let's start with the inventory of existing homes for sale.
Existing homes for sale have fallen to the lowest levels on record over the past year. The 2.2-month supply is less than half the four-to-six-month supply that is considered healthy. There are multiple reasons for this result, but the biggest is the utter collapse in homebuilding after the global financial crisis. Now, there's not enough to go around.
While home construction fell to five-decade lows, household formation and the population continued to rise:
This is an incredible opportunity for Meritage Homes. After a record 2021, Meritage expects to sell 17% more homes in 2022, and EPS to grow 40%. At recent prices, you can buy Meritage Homes for about three times 2022 earnings.
There's certainly short-term risk if the economy struggles. But the massive shortage of homes needs to be filled, and Meritage is primed to be a huge winner in the years ahead.
A unique lithium opportunity
Tyler Crowe (GrafTech International): You've probably never heard of GrafTech, but hear me out. GrafTech manufactures two critical industrial components: Graphite electrodes for making steel in electric arc furnaces, and electrodes for lithium-ion batteries. GrafTech owns 25% of the global market outside of China and one of the five factories that can produce needle coke, the raw material needed for making graphite electrodes. It is a critical cog in making steel and lithium-ion batteries that will be incredibly difficult to replicate or replace.
The company had struggled with debt before being bought out by Brookfield Asset Management in 2015, which then took it public again in 2018. Since that time, the company has drastically improved its cost structure and it now generates lots of free cash flow. Over the past 12 months, it generated 18% of its market cap in free cash flow. That cash has largely been used to pay down debt, but it also just bought back $30 million worth of shares in the most recent quarter, a sign that management is more comfortable with its debt levels.
Yes, it's a niche business. And yes, it is exposed to cyclical markets like steel. But the fact of the matter is that it is a quality business that churns out free cash flow. Today, its stock trades for only 5.3 times earnings. Not a lot can go wrong for a stock that's priced that low.
An overlooked e-commerce stock
Jeremy Bowman (MercadoLibre): The e-commerce sector hasn't gotten much love lately. First-quarter growth rates were among the worst in memory. Amazon is subletting excess warehouse space, and several growth stocks posted year-over-year declines in gross merchandise volume.
However, one e-commerce stock that's continued to grow in spite of the headwinds is MercadoLibre. Currency-neutral revenue jumped 67% in the first quarter to $2.2 billion with a 32% increase in gross merchandise volume to $7.7 billion and an 81% jump in total payment volume to $25.3 billion.
In addition to being Latin America's leading e-commerce operator, it's also built a healthy payments business through Mercado Pago, and by installing point-of-sale machines with brick-and-mortar merchants, has tapped into offline retail as well as online retail.
Additionally, the company has its own logistics service, Mercado Envios; an asset management branch, MercadoFondo; and a financing arm, Mercado Credito.
In many ways, the company resembles a Latin American Amazon, leveraging its lead in e-commerce to strengthen its competitive advantage through new businesses. While the company is still growing briskly, the stock hasn't been immune from the earthquake in e-commerce stocks as it's down roughly 60% from its peak last November. Still, as a pure-play on Latin America, it's much more insulated from a potential U.S. recession than your typical domestic e-commerce stock.
Given its growth rate and that profitability is quickly ramping up as the business scales, the stock's 60% slide seems like a mistake. Now's a great time to take advantage.