Inflation, rising interest rates, geopolitical uncertainties, and other macro headwinds have crushed many promising stocks over the past year. Names that generated multibagger gains throughout the pandemic now trade below pre-pandemic levels, and their near-term prospects seem grim as investors rotate toward more conservative investments.
That said, the recent sell-off has also created some lucrative buying opportunities for long-term investors. For those with patience, these three stocks are screaming buys right now: MercadoLibre (MELI -0.36%), Target (TGT 1.64%), and Lululemon (LULU 1.84%).
1. MercadoLibre
MercadoLibre, the largest e-commerce company in Latin America, currently trades at just three times this year's sales. That's a ridiculously low price-to-sales ratio for a company expected to generate 47% sales growth this year and another 30% growth next year.
In its latest quarter, MercadoLibre's unique active users grew 16% year over year to 81 million; its gross merchandise volume (GMV) rose 32% to $7.7 billion; and its total payment volume (TPV) jumped 81% to $25.3 billion. On a two-year basis, which smooths out its uneven growth rates throughout the pandemic, its GMV grew 73% in constant-currency terms.
Gross margins have also consistently expanded over the past year, and its operating margins are rising as economies of scale kick in. Analysts expect its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise 50% in both 2022 and 2023. It still has plenty of room to expand across Latin America, which remains one of the world's fastest-growing, underpenetrated e-commerce markets.
MercadoLibre's stock slumped this year as e-commerce stocks lost their luster in a post-lockdown world. Rising interest rates also drove investors away from higher-growth tech stocks -- and they unfairly tossed out resilient market leaders like MercadoLibre with the bathwater. I believe investors who ignore that near-term noise and buy this stock will be well rewarded in just a few years.
2. Target
Target was once considered a victim of the retail apocalypse. But after CEO Brian Cornell took the helm in 2014, the retailer renovated its stores, expanded its private-label brands, strengthened its e-commerce ecosystem, and used its brick-and-mortar stores to fulfill online orders.
Those moves all widened Target's moat against Amazon and Walmart and put it in a strong position as the pandemic generated tailwinds for superstores and online retailers throughout 2020.
Target's revenue rose 20% to $93.6 billion in fiscal 2020 (which ended last January), and that $15 billion in new sales exceeded its cumulative sales growth over the previous 11 years. Revenue grew another 13% to $106.0 billion in fiscal 2021, allaying concerns about a significant post-pandemic deceleration, and its adjusted earnings per share (EPS) also increased 44%.
However, management only expects revenue to rise in the "low-to-mid-single digit range" this year. The company also warned investors its operating margin would decline in the fiscal second quarter as it optimized its inventories to deal with ongoing supply chain challenges.
However, Target also expects its margins to recover in the second half of the year as it resolves those issues. It's still a Dividend King that recently raised its payout for the 51st consecutive year, and the stock currently boasts a yield of 3% and trades at just 11 times forward earnings. That high yield and low valuation make it a screaming buy in this volatile market.
3. Lululemon
Lululemon has been one of the market's most resilient apparel retailers. Back in 2019, the company set its "Power of Three" goals: It claimed it could generate double-digit annual revenue growth through the end of fiscal 2023 by doubling its men's revenue, doubling its digital revenue, and quadrupling its international revenue relative to 2018. It accomplished its men's and digital revenue goals ahead of schedule last year -- even as it withstood unexpected closures during the pandemic -- and it's on track to achieve its international revenue goal this year.
This April, Lululemon introduced its new "Power of Three x2" five-year growth plan, which is aimed at doubling its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion by fiscal 2026. Once again, the company intends to double its men's and digital revenues -- and quadruple its international revenues -- with fiscal 2021 as its new baseline year.
Lululemon generates such consistent growth, because it established an early-mover's advantage in the premium yoga and athleisure apparel market. It locks in its shoppers with free yoga classes and other community events, limits its markdowns to preserve its brand appeal, and has aggressively expanded its e-commerce platform to grow its direct-to-consumer (DTC) sales. The company also consistently opened new brick-and-mortar stores as other retailers shuttered their locations to cut costs.
Its stock isn't cheap at 25 times forward earnings, but it deserves to trade at a premium as it remains on track to generate double-digit revenue and earnings growth for the foreseeable future.
