Wall Street has been a bleak place in 2022. The S&P 500 market index has dropped 18% lower year to date, and the more volatile Nasdaq Composite index is down by 26%. The COVID-19 health crisis is not going away, inflation is raging in many countries, and several industries have stumbled into uniquely deep recessions.
But you know what they say about recessions, right? Master investor Warren Buffett insists that successful investors don't follow the crowd, and that market crashes should be seen as buying opportunities.
"Opportunities come infrequently," Buffett said in his 2010 letter to investors. "When it's raining gold, reach for a bucket, not a thimble."
On that note, some of the hardest-hit stocks on today's market strike me as incredible buying opportunities right now. Here's why I'm particularly interested in Netflix (NFLX -1.85%), PayPal Holdings (PYPL 2.78%), and Sleep Number (SNBR 4.91%) during this market correction.
My top pick: Netflix
Yes, Netflix shares have pulled off a modest recovery recently. A solid second-quarter earnings report has lifted the media-streaming veteran's stock more than 30% above the multi-year lows of May. However, the buying window never closed.
Netflix prices still sit nearly 40% lower than they did before the first-quarter report in April, and you can pick up shares at prices last seen in early 2018. In fact, Netflix is the worst-performing stock among the S&P 500 constituents this year, even after the recent boost.
That would make sense if Netflix's business had run into a brick wall, but that's not what is happening here. In the second quarter of 2018, Netflix reported $3.9 billion in total revenue and 124 million streaming members. Earnings stopped at $0.85 per share in that quarter. Four years later, quarterly sales doubled to $8.0 billion, and the streaming subscriber base rose by 78% to 221 million. Earnings nearly tripled to $3.20 per share.
Netflix is a fast-growing steamroller of a business. The company ran into a subscriber-growth speed bump in the first half of 2022, but the long-term growth trajectory remains clear and inspiring. I think you're making a big mistake if you're not buying Netflix stock at these bargain-bin prices, hand over fist.
Another deep value idea: PayPal
Nursing a 59% year-to-date haircut, electronic payments expert PayPal is another one of the S&P 500's deepest discounts in 2022.
Like Netflix, PayPal is trading at prices not seen since 2018. PayPal's business is also booming, just like Netflix's. Trailing sales have more than doubled in five years, and free cash flows are up by 67%:
An investment in PayPal is a direct play on the e-commerce market. The Venmo service boasted 85 million users and processed $57.8 billion of transactions in the first quarter. We are looking at a market leader here, and its chosen field of expertise happens to be an explosive growth sector on a global level.
And PayPal continues to innovate. The company is developing its own stablecoin and exploring cryptocurrency-powered payment options. Amazon shoppers in the U.S. will soon have the option to pay for their Amazon shopping with the user-friendly Venmo app. A recently announced PayPal credit card with generous cashback features extends the company's reach into the market for small-business credit services. I'm just scratching the surface here, as PayPal's stream of product and partnership announcements never seems to end.
PayPal is another fast-growing innovator that was thrown out with the market's bathwater in early 2022. Like Netflix, this top-notch company should deliver tremendous shareholder returns if you buy in at these deeply discounted share prices.
A sleepy little wildcard: Sleep Number
High-tech mattress maker Sleep Number's share prices have taken a 54% dive in 2022, but this small-cap company is not a part of the S&P 500 club. If it were, it would have been the seventh-worst performer on that index this year.
I think the theme of this little list should be clear by now. Just like PayPal and Netflix, Sleep Number's stock has taken a beating this year. And just like the two larger growth phenoms, Sleep Number keeps delivering robust business results. Annual sales rose 133% from 2012 to 2021, while free cash flows soared 375% higher:
The rock-steady long-term growth hit a snag in early 2022, as a global shortage of semiconductors diminished Sleep Number's ability to manufacture its ultra-adjustable mattress systems. It's an unusual twist when a mattress maker is tripped up by production issues in the semiconductor sector, of all places, but that's life in the fast lane.
But chip-making slowdowns don't last forever, and there are signs of a robust recovery over the next few quarters. Sleep Number should benefit from that long-awaited rebound. The stock is priced as if Sleep Number stood on the brink of bankruptcy, but the company is firmly profitable despite the supply chain setback and poised for an impressive comeback.
You can grab Sleep Number shares at the ridiculously low valuation ratios of 9.7 times trailing earnings and 5.8 times free cash flows. That's a bargain in my book.