If you're feeling nervous about the stock market, you're not the only one.
Investors are coping with their first sustained bear market in more than 13 years. Inflation is as high as it's been in 40 years, and the economic disruption from the pandemic has made it nearly impossible to predict what's next.
For investors, the bear market may be nerve-wracking, but it also presents an opportunity to buy high-quality stocks on sale. If you've got $1,500 to spare, about a week's paycheck for the average, the three stocks below are likely to make it grow. Splitting the $1,500 three ways will give you a good mix of growth and safety.
1. Costco: A market-beating stock in any economy
If there's any brick-and-mortar retailer that deserves to be called bulletproof, it's Costco (COST -0.79%). The warehouse retailer is the clear leader in the membership-based, buy-in-bulk category, and its base of 64.4 million households gives it a level of customer loyalty that the typical retailer doesn't have. That membership income also allows the company to offer rock-bottom prices on merchandise.
Costco members love the chain for its low prices, quality products, great savings, and variety of merchandise. Its membership renewal percentage is now over 90% globally and above 92% in North America.
The retail giant has performed well not only in the brick-and-mortar channel but also online as it's finally embraced e-commerce after years of avoiding it. Costco has proven its mettle throughout the pandemic, outperforming during early stages of the crisis and more recently, even as peers like Walmart and Target have seen profits shrink due to inflation and excess inventory. Comparable sales adjusted in the fiscal year that just ended rose 10.6%, and its operating income increased 8% to $1.8 billion at a time when most of the retail sector is seeing earnings fall.
With the stock down more than 20% from its peak this year, Costco should reward long-term investors at the current price.
2. Alphabet: A digital advertising beast
Google parent Alphabet (GOOG -1.18%) (GOOGL -1.32%) has been a longtime winner on the stock market largely because of one product. Google Search is the most successful advertising product in the history of the world and continues to deliver solid top-line growth and wide operating margins even when much of the rest of the digital advertising industry is struggling due to challenges from Apple's ad-tracking transparency initiative and the rise of TikTok.
In its most recent quarter, Alphabet brought in $69.69 billion, an increase of 13% year-over-year, and delivered an operating margin of 28%. This was driven primarily by growth in Google Search.
Alphabet's search product has dominant market share in the world outside of China, and it continues to grow, as a search engine is an essential utility in the modern world, and demand to be on Google's search page is increasing. Its cost-per-click rate also rebounded last year after a lull during 2020.
Alphabet stock looks well-priced at the moment, trading at a price-to-earnings (P/E) ratio of just 19, essentially even with the S&P 500. Considering the business has long outgrown the S&P 500, and the company is gaining market share in digital advertising, Alphabet looks well positioned to beat the market from here.
3. ServiceNow: A reliable cloud winner
The software-as-a-service sector (SaaS) has gotten slammed over the last year, and it's easy to see why. Price-to-sales (P/S) ratios for many of these stocks were at 30 or even higher, and many of those were unprofitable. Too much growth was priced in, and rising interest rates and recession fears caused an abrupt shift in market sentiment and valuations.
However, not every software stock is unprofitable, and ServiceNow (NOW -2.55%) offers a great example of a larger, mature cloud stock that you can count on to deliver solid returns. ServiceNow offers a wide range of software products for IT services and operations, as well customer service and workflows.
The company's performance speaks for itself as it has a long track record of steady growth and profitability as the chart below shows.
NOW Operating Revenue (Quarterly YoY Growth) data by YCharts.
In its most recent quarter, the number of customers spending at least $10 million with ServiceNow topped 100, and quarterly non-GAAP revenue increased 29.5% year over year to $1.82 billion. Adjusted operating income was $399 million, equal to a 23% margin. And, with its backlog up 27% in currency-neutral terms to $12 billion, the company seems to be resisting the macroeconomic headwinds.
ServiceNow stock is down 40% from its peak last fall, and the stock looks very reasonably priced at a P/E ratio of 44 based on 2023 expected earnings.
With that growth trajectory and valuation, ServiceNow looks set to outperform in the next bull market.
