No matter how long you've been putting your money to work in the stock market, it's been a challenging past five months. Since the year began, the widely followed Dow Jones Industrial Average has dipped as much as 15% from its all-time closing high. The benchmark S&P 500 has fared modestly worse, with a peak-to-trough intraday decline that briefly touched 20%.
But it's the growth-stock-driven Nasdaq Composite (^IXIC 0.22%) that's been taken to the woodshed. In the six months following its record-closing high, the Nasdaq declined by as much as 31%, which firmly places the index in a bear market.
While bear markets can be scary for their rapid downside moves, increased volatility, and poor investor sentiment, they're also known for being the perfect time to put your money to work. After all, every sizable decline in the major indexes, including the Nasdaq, has eventually been erased by a bull market rally.
With the Nasdaq getting pummeled, a number of absolute bargains have emerged. All that's required for investors to become richer is to buy these screaming bargains and hold them for the next 10 years.
The first bargain to scoop up during the Nasdaq bear market decline is none other than FAANG stock Alphabet (GOOGL 1.54%) (GOOG 1.55%), the parent company of internet search platform Google and popular streaming platform YouTube.
Although the broader market staged one heck of a relief rally last week, shares of Alphabet hit a 52-week peak-to-trough decline of 33% as of May 24. Alphabet is an advertising-driven company, and ad revenue tends to be one of the first things to be hit when economic growth slows or the U.S. economy enters a recession. With the Federal Reserve intent on getting inflation under control -- and willing to raise interest rates rapidly to do so -- some level of economic cooling should be expected.
However, an expected short-term lull in the U.S. economy is no reason to be scared to the sideline when a company like Alphabet offers three clear-cut competitive advantages.
To begin with, internet search platform Google is a veritable monopoly. Data from GlobalStats shows that Google has accounted for between 91% and 93% of worldwide search share over the trailing two years. Playing such a dominant role in global search allows Alphabet to command excellent pricing power when it comes to ad placement.
Second, YouTube has become the second-most-visited social media site on the planet, with an estimated 2.2 billion monthly active users. Not surprisingly, Alphabet has been able to pivot this interest into steady ad growth and high-margin YouTube premium memberships.
And third, Google Cloud is the global No. 3 in cloud infrastructure spending. Even as ad sales softened in the first quarter, Google Cloud delivered 44% sales growth from the prior-year period. Cloud infrastructure is, arguably, still in its early innings of growth. More important, cloud-based operating margins should be considerably higher than ad-based operating margins over time. What this means is Google Cloud could potentially double Alphabet's operating cash flow per share by as soon as 2025.
Alphabet has traded at an average multiple of 19 times its cash flow over the past five years. Opportunistic investors can buy shares right now for close to 8 times forecast cash flow in 2025.
Another absolute bargain to buy hand over fist and hold 10 years as the Nasdaq plunges into a bear market is furniture stock The Lovesac Company (LOVE 1.59%).
I don't know about you, but just uttering the phrase "furniture stock" is normally enough to make me sleepy. Most furniture chains are reliant on foot traffic into brick-and-mortar stores and buy their merchandise from a small group of wholesalers. It's a rather boring industry that's ripe for disruption, which is where Lovesac comes into play.
Lovesac is a designer and retailer of modular furniture. Though it was initially known for its beanbag-styled chairs ("sacs"), nearly 88% of Lovesac's revenue is now derived from selling sactionals (the company's term for its sectionals). These modular couches can be rearranged dozens of ways to fit virtually any living space.
What makes sactionals so appealing is the customization and options involved, as well as their eco-friendly construction. Sactionals have more than 200 different cover options, meaning they'll work with any color or theme inside a home. They also have numerous upgrade options, including wireless charging stations and top-tier surround-sound systems built in. But the best part of sactionals might be that the yarn used in their production is made entirely from recycled plastic water bottles.
Although historically high inflation has investors seriously concerned about retail stocks, Lovesac should feel less of a sting than most retailers. That's because its furniture tends to be priced at a premium. Since the company's core customer is typically middle- to upper-income, inflation shouldn't have a big impact on their purchasing habits.
The other factor that sets Lovesac apart is its omnichannel sales platform. When the pandemic struck, Lovesac was able to shift about half of its sales online. Even though it has 146 retail locations in 39 states, the company operates a generally lower-overhead structure that involves online sales, pop-up showrooms, and brand-name in-store and online partnerships. The end results are higher margins than traditional furniture stocks, and -- thus far -- considerably faster growth.
For the time being, shares of Lovesac can be purchased for just 8 times Wall Street's forecast earnings in fiscal 2023, despite the company sustaining annual sales growth of more than 20%.
At the moment, Pinterest is contending with a double whammy. First off, its monthly active user (MAU) numbers have been declining for the past year. Wall Street typically views MAU declines as bad news for engagement-driven social media companies. The other issue is the aforementioned growing likelihood of an economic slowdown or recession. Like Alphabet, Pinterest is predominantly an advertising platform.
While both of these headwinds are tangible, neither is a threat to Pinterest's long-term growth prospects.
For example, Pinterest's MAU decline from 478 million in March 2021 to 433 million in March 2022 can be explained by an uptick in COVID-19 vaccination rates. With life returning to some semblance of normal, people aren't spending as much time online anymore. But if you overlook the initial MAU pop and subsequent decline during the pandemic and widen the lens of user growth to encompass the past five years, you'd see a steady upward trend in monthly active users.
What's far more important from an investment perspective than the sheer number of active users on the platform is Pinterest's ability to monetize its existing users. In this respect, there have been no problems. Despite a 9% decline in year-over-year MAUs, global average revenue per user (ARPU) jumped 28% from the prior-year period in the first quarter. What this ARPU figure demonstrates is that advertisers are willing to pay up to reach Pinterest's growing base of shoppers.
Something else to consider about Pinterest is its unique operating model. Whereas Apple's iOS privacy changes that impact data tracking have Wall Street worried about ad-driven social media companies, Pinterest appears virtually immune to this privacy shift. That's because it doesn't have to rely on "likes" to help advertisers target users. The entire premise of Pinterest's platform is to have its users willingly share the things, places, and services they like. This allows merchants to precisely target users with their products and services.
What investors are getting with Pinterest is a company capable of sustained annual revenue growth of 20% that can bought for around 18 times Wall Street's profit forecast for 2023. It's a heck of a bargain for a company that should be somewhat immune to the headwinds impacting social media stocks.