In today's bear market, there are plenty of cheap stocks, but some of them deserve to be. However, a handful have been dragged down by general sentiment, and these stocks are the ones investors should be keying in on to buy.
Three I believe are cheap but still valuable right now are Alphabet (GOOG -1.80%) (GOOGL -1.82%), MercadoLibre (MELI -1.96%), and Upstart (UPST -7.89%). While they may see some short-term headwinds, I believe the business model for each will do well over the long run. Here's why.
1. Alphabet
While Alphabet may be little known to noninvestors, the companies it owns are not. Under its umbrella are Google, YouTube, and the Android operating system. Although this may seem like a diversified company, 80% of its revenue is derived from advertising sources.
This concentration is precisely why the stock is valued at about 20 times earnings, close to an all-time low and down nearly 30% from its high. Advertising budgets get cut during recessions, and Alphabet is in the crosshairs.
However, I think this notion is misguided. Take a look at Alphabet's trailing-12-month revenue since 2005. It barely faltered during the 2020 COVID-induced recession or the 2007-09 Great Recession.
GOOG Revenue (TTM) data by YCharts
Now I can hear the criticism: "The COVID recession barely lasted a couple of months! This time is different!" While I agree with this, there was hardly any travel advertising during 2020, and Alphabet still managed to maintain its course. While Alphabet may see pressure across the board, it won't have an entire segment evaporate.
Stripping away those concerns, Alphabet is a hardy business. It has nearly $134 billion on its balance sheet in cash and equivalents, and its return on invested capital was 28% in the latest quarter. Furthermore, Alphabet has a $70 billion share repurchase plan being executed at an all-time low valuation, meaning management is getting more bang for its buck with its buyback program.
Alphabet is one of the most stable companies on the planet and an excellent buy to provide growth and stability to your portfolio.
2. MercadoLibre
While e-commerce seems to have played out with other companies, MercadoLibre is just getting started. Based in Latin America, MercadoLibre provides all the tools necessary (like an online marketplace, digital payments, shipping logistics, and consumer credit) for e-commerce to thrive.
When someone says a company is "firing on all cylinders," they should point toward MercadoLibre. During the first quarter, its fintech revenue rose 113% year over year (YOY) to $971 million, while commerce revenue increased 44% YOY to $1.3 billion. Digging in a bit deeper, MercadoLibre delivered 79% of packages within 48 hours of ordering, and its fintech take rate exploded 20% higher thanks to its credit division.
Despite this execution, the stock is trading at record lows.
MELI PS Ratio data by YCharts
In 2009, the world's financial system was teetering on the brink of collapse -- yet you can purchase MercadoLibre's stock for the same valuation now as you could back then.
The negative sentiment could be derived from MercadoLibre's shaky profitability (although it posted a 2.9% net income margin this quarter). However, MercadoLibre is still relatively early in its growth phase, and investors should be excited about the growth it still has to capture.
3. Upstart Holdings
Upstart's stock has had a wild ride since going public in late 2020. It once traded for more than $400, but today you can pick it up for about $35. A dramatic fall like that usually indicates a failing business or perhaps a management scandal. However, for Upstart, it was one factor: extreme valuation. At its peak, Upstart traded for nearly 45 times sales; now, it trades for just under three.
While some software companies trade that high, companies in the business of approval loans don't. Upstart's model replaces the traditional FICO consumer credit score by utilizing artificial intelligence (AI) to assess lending risk more accurately. The program works well enough that lenders can approve the same amount of loans while experiencing 75% fewer defaults.
So if Upstart is taking on Fair Issac Co. and its FICO score we should compare it to its established competitor.
UPST PE Ratio data by YCharts
It's not often you have the challenger winning business from the incumbent yet trading at a lower valuation than its rival, but that's what's happening here.
To top things off, Upstart's Q1 revenue rose 156% YOY while the company posted an 11% profit margin. Upstart's also expanding into auto loans in addition to its initial offering of personal loans.
While it's a valid argument that fewer consumers will be taking out loans for purchases, banks will want to tighten up their lending practices while maintaining as much business as possible. What better way to do this than to employ Upstart's solution, which is proven to reduce risk while maintaining approval rates?
If Upstart can capture business during a recession, its business will boom when the economy recovers and consumers are confident enough to make large purchases.
While I don't know when the market will recover, I'm confident that these three companies will emerge stronger than when they entered the bear market. Whether that's in a year or three, I'm not sure. But over the long haul, I can think of few better places to invest in right now.
