This has been one of the roughest starts to a year for investors in decades. On a year-to-date basis, through Thursday, June 23, the iconic Dow Jones Industrial Average, broad-based S&P 500, and growth-driven Nasdaq Composite were respectively lower by 16%, 20%, and 28%.
But amid this turmoil is a bright light -- and I'm not just talking about the long days associated with the summer solstice. Although big stock-market declines can be unnerving, history has repeatedly shown that these dips create opportunities for long-term investors to scoop up great companies at a discount.
Image source: Getty Images.
As we steam ahead into summer, a number of phenomenal deals have emerged among fast-growing companies. Here are three growth stocks that are screaming buys this summer.
Amazon
The first fast-paced stock that stands out as an amazing deal this summer is e-commerce behemoth Amazon (AMZN -1.65%). While it's not a stock that's going to win you any points for originality, it's backed well off of its all-time high despite little or no deterioration in its operating cash flow forecast.
At the moment, retail stocks are out of favor. Threats to the near-term potential for sales and profit growth of retail-oriented companies include significant inventory buildups, persistent supply chain disruptions, and historically high inflation hurting the lowest-earning decile of shoppers. Thankfully, Amazon has a few tricks up its sleeve.
To begin with, it's the most dominant online retailer on the planet. A March 2022 report from eMarketer estimated Amazon would bring in 39.5% of all online retail revenue in the U.S. this year. That's more than 8 percentage points higher than companies 2 through 15 in online retail market share added together.
Even though retail sales are challenged, being the dominant player comes with a big perk: Amazon has had no issue signing up customers for a Prime subscription. The annual fees the company collects from its roughly 200 million global Prime subscribers help it to grow its enormous logistics network, and can be used as a margin buffer to undercut brick-and-mortar retailers on price.
While Amazon is best known for its retail ties, the most important thing to recognize is that the bulk of its operating cash flow is generated from its other sales channels, which have higher margins. For instance, Amazon Web Services (AWS) is the world's leading provider of cloud infrastructure services. AWS has consistently grown by 30% to 40% annually and usually accounts for the majority of Amazon's operating income, despite only tallying around one-eighth of the company's total sales.
Throughout the 2010s, Wall Street willingly purchased Amazon stock for a multiple of 23 to 37 times its year-end operating cash flow. Based on Wall Street's consensus estimate for 2024, shares can now be bought for a mere 9 times forecast operating cash flow. That's an incredible bargain for one of the world's most influential companies.
Cresco Labs
A second growth stock that looks like a screaming summer buy is U.S. cannabis player Cresco Labs (CRLBF -5.34%). Cresco is a multi-state operator (MSO) with 50 retail locations spanning 10 states.
If you thought certain sectors or industries of the market have fallen out of favor, take a closer look at U.S. marijuana stocks. Most have declined by at least 75% from their all-time highs. This is primarily because a Democrat-led Congress has failed to pass any cannabis reforms, including legalization, or even permitting banks to serve companies involved with cannabis. Without federal cannabis reforms, Wall Street doesn't appear all that excited about the industry's prospects. But that's a mistake.
Although legalization would alleviate a number of inefficiencies for pot stocks when it comes to taxation and operational redundancies (for example, cannabis can't be transported between states, leading MSOs to set up vertically integrated operations in numerous states), it's not a necessity for companies to thrive. With three-quarters of all states legalizing weed in some capacity, opportunity abounds for leaders like Cresco.
Despite having a footprint in a handful of high-dollar marijuana markets, Cresco's retail expansion is notable for two reasons. First, it's chosen to operate in a number of limited-license states. These are markets where regulators purposely limit the total number of retail licenses issued in order to spur competition. It effectively gives Cresco Labs a fair shot to build up its brand(s) and grow a following without being overrun by an MSO with deeper pockets.
The other interesting aspect of Cresco's expansion strategy is its pending all-share acquisition of MSO Columbia Care (CCHWF -1.70%). Assuming the deal is completed, Cresco will instantly have one of the largest retail footprints in the country. Columbia Care has primarily grown through acquisitions in high-dollar markets.
The other differentiator for Cresco Labs is its industry-leading wholesale business. Wall Street is rarely a fan of wholesale cannabis given its lower margins, relative to the retail side of the equation. However, Cresco has volume on its side. It's able to place its proprietary brands into more than 575 dispensaries in California, the largest weed market in the U.S.
If Cresco Labs can seamlessly integrate Columbia Care while growing in existing markets, recurring profitability should be right around the corner.
Image source: Starbucks.
Starbucks
A third and final growth stock that stands out as a buy this summer is coffee chain Starbucks (SBUX -1.02%).
It's no secret that Starbucks is facing multiple headwinds. It's contending with COVID-19-related store closures in select international markets, historically high inflation on the goods it's purchasing, and is dealing with the reality that some of its U.S. stores are unionizing. The latter has the potential to drive up wage costs at a time of heightened uncertainty.
While there are clear concerns, it's also worth recognizing that Starbucks has been through its fair share of economic downturns and periods of uncertainty, and it's come out stronger every time.
Arguably the top selling point for Starbucks investors is the loyalty of its customer base (myself included). As of April 3, Starbucks had 26.7 million active Rewards members. These folks typically spend more than non-Rewards members, and they're more inclined to use mobile ordering and/or store their payment information on their smartphones. For a free cup of coffee or food item every now and then, Rewards members are helping Starbucks' stores operate more efficiently.
Additionally, Starbucks has demonstrated for decades that it has exceptional pricing power. No matter how rapidly the price of coffee or labor increases, Starbucks has, historically, never had an issue passing along these costs to consumers. It's why the company's sales seemingly expand by 10% or more every year.
Starbucks' investments are also hitting home. In the wake of the pandemic, the company has revamped its drive-thru ordering boards to include suggestions for food and beverage pairings with high margins. It also allows baristas to communicate with drivers via video chat. That's a way for the company to keep the personalization of in-store visits intact while promoting the convenience and speed of drive-thru.
With shares of Starbucks 40% below their all-time intraday high, now looks like the perfect time for opportunistic investors to pounce on this hot deal.
