It's been a bumpy ride for Wall Street in 2022. Since the widely followed Dow Jones Industrial Average and broad-based S&P 500 hit their respective all-time closing highs in early January, both have fallen into correction territory (i.e., a decline of at least 10%). As for the technology-driven Nasdaq Composite, it's lost more than a quarter of its value in under seven months, which places it in a bear market.
While there's no question that big declines in the stock market can be unnerving, history has repeatedly shown that these dips are the ideal time for long-term investors to pounce. Not only are corrections often short-lived, but every notable drop throughout history has eventually been erased by a bull market rally.
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For investors who have cash at the ready and time on their side, now could be the perfect opportunity to buy stakes in innovative companies that have the potential to generate life-changing wealth. What follows are three stocks with the tools to do so over the next 20 years.
Etsy
The first unique company that can help long-term investors build generational wealth over the next two decades is e-commerce platform Etsy (ETSY -0.86%).
For the moment, there's probably not a dirtier six-letter word than "retail." Retailers have been clobbered by significant inventory buildup, supply chain challenges tied to the COVID-19 pandemic as well as the war in Ukraine, and historically high inflation, which is hurting the purchasing power of low-income consumers. These headwinds are liable to persist throughout 2022, if not into 2023.
But when examining Etsy's long-term potential, these near-term headwinds are very likely nothing more than minor speed bumps.
The top reason to buy shares of Etsy is its ability to differentiate itself in the highly competitive online retail arena. Whereas most online retail platforms are built for volume, Etsy's e-commerce platform is designed for customer engagement. That's because most of Etsy's merchants are small businesses that create unique or customized products for shoppers. There isn't an e-commerce platform with greater personalization at scale than Etsy, which is a tangible and sustainable competitive edge.
Another reason for Etsy's success is its willingness to reinvest in its platform. The company has beefed up its marketing expenses, enhanced the analytics and tools sellers on the platform use to manage their orders and connect with buyers, and introduced video listings, which are designed to boost shopper engagement.
Etsy has also done an incredibly good job of turning casual shoppers into habitual buyers. According to Etsy, a "habitual buyer" is someone who makes at least six purchases over the trailing-12-month period, with those aggregate buys totaling north of $200. Between the end of 2019 (i.e., before the pandemic began) and the end of 2021, the number of habitual buyers soared 224%. Perhaps this figure, more than any other, is the company's key to charging merchants higher fees.
Having carved out a niche in the steadily growing online retail space, Etsy can be a serious moneymaker for patient investors.
Trupanion
A second highly innovative growth stock that can generate life-altering wealth over the next two decades is companion animal health insurance provider Trupanion (TRUP 5.10%).
The big knock against Trupanion is that it's an unprofitable company at a time when valuations are coming back into focus. With inflation and interest rates climbing, investors are wanting to put their money to work in companies with proven track records. Trupanion doesn't yet have the recurring profitability that places it on the same tier as time-tested insurers.
However, these near-term losses shouldn't scare opportunistic investors away from a company with numerous competitive advantages in its sails.
To begin with, the pet industry is arguably one of the most recession-resistant industries on the planet. Last year, $123.6 billion was spent on companion animals in the U.S., according to data from the American Pet Products Association (APPA). Not only has it been over a quarter of a century since year over year pet spending in the U.S. declined, but the number of households that owns a pet hit an all-time high of 70% in the 2021-2022 APPA survey. Owners treat their pets as family members, and this data shows they'll open up their wallets in any economic environment to ensure their well-being.
Buying health insurance for a cat or dog is a logical extension of this desire of owners to ensure the well-being of their pets. Based on an April presentation from Trupanion, only 2% of the U.S. and Canadian companion animal market has been penetrated by health insurance coverage. If the U.S. were to reach a 25% penetration rate, which mirrors the companion animal insurance rate in the U.K., Trupanion's total addressable market would be $38.3 billion. For some added context, pet medical insurance spending grew by a compound annual rate of 23% between 2015 and 2020.
Despite pet insurance being a competitive segment, Trupanion can lean on the more than two decades of rapport it's built up with veterinarians and their staff at the clinic level. Among large-scale pet insurers, it also happens to be the only one that provides software to vet clinics that supports payment at the time of services rendered. That means less hassle for pet owners and the clinic.
Trupanion offers sustainable double-digit growth potential in an industry that's proven it can weather economic downturns.
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Sea Limited
A third growth stock that can generate life-changing wealth in 20 years is Singapore-based conglomerate Sea Limited (SE -2.20%).
Similar to Trupanion, Sea is facing an uphill climb in the short run due to large operating losses. With tech stocks getting clobbered, companies like Sea have endured substantial price-to-sales multiple contraction. Then again, Sea wouldn't be on this list if it didn't have something special to offer long-term investors.
Sea's secret sauce (say that three times fast) is that it has three rapidly growing, yet independent, operating segments.
At the moment, the company's gaming division, known as Garena, is its only segment generating positive earnings before interest, taxes, depreciation, and amortization (EBITDA). The company's hit mobile game Free Fire is predominantly responsible for Garena's growth. What's particularly noteworthy is that 10% of quarterly active gamers are paying to play, which is many multiples higher than the industry average pay-to-play conversion ratio for mobile gaming.
Sea's digital financial services segment should be another source of long-term outperformance. Consumers in some of the emerging markets Sea operates in lack access to basic financial services. SeaMoney aims to fix this by providing digital wallet access and services.
But the operating segment that's garnering a lot of attention is e-commerce platform Shopee. Shopee has made big strides in Brazil and is the most-downloaded shopping app in Southeastern Asia. In all of 2018, $10 billion in gross merchandise value (GMV) traversed Shopee's platform. Now, Shopee has a GMV annual run rate of nearly $70 billion.
Although it could still take a few years before Sea Limited turns the corner to recurring profitability, it has a foundation in place that should prove quite fruitful for long-term investors.
