Nobody likes to see their portfolio's value fall, but long-term investors know this truth about bear markets: If you're a net buyer of stocks, bear markets are the best times to buy. That's because so many great businesses are trading at a discount. At times like these, investor sentiment is driven largely by fear. In this case the fear is over a recession and the prospect of rising interest rates. However, market sentiment will eventually shift, and when it does, you can bet that many of these stocks, especially the ones with strong fundamentals, will come roaring back.
If you're on the hunt for bargain stocks, two of my favorite companies look surprisingly cheap. Keep reading to see why Airbnb (ABNB -1.30%) and Target (TGT -1.33%) are screaming buys right now.
This travel stock is turning into a juggernaut
Like much of the tech sector during this bear market, Airbnb's stock performance has been rocky. Shares surged through much of 2021 after its 2020 initial public offering (IPO), but have since given back those gains, tumbling 33% so far in 2022.
However, that price action is a poor reflection of the performance of the underlying business. Unlike the tech sector, the company has thrived as the pandemic lockdown measures have receded and travel has come roaring back.
Revenue surged 58% in the second quarter to $2.1 billion, and Airbnb has become highly profitable as its wide-moat marketplace model finally seems to be realizing its potential.
In the second quarter, Airbnb generated an EBITDA margin of 34%, and its free cash flow margin was 38%, a reflection of a business model that requires almost no spending on capital expenditures. Even under generally accepted accounting principles (GAAP), the company posted an enviable profit margin of 18%.
Airbnb's core strengths are self-evident. The company has a monopoly in vacation rentals with 74% market share, and its business model creates an economic moat through network effects while monetizing the work of hosts to provide the service to guests. It's also rapidly penetrating a market valued at more than $1 trillion, and one that should expand thanks to the popularity of remote work.
There's another hidden reason why Airbnb is a great stock to buy right now. The company collects interest on the funds it holds in between guest bookings and when the guest's stay begins. In the second quarter, it earned $20.2 million in interest income and that number could surge as interest rates rise.
Finally, Airbnb looks reasonably priced right now with a trailing price-to-earnings ratio of 63. For a company growing rapidly, expanding margins, and penetrating a huge market, that looks like a great entry point.
One retail stock that's down but not out
2022 has been a rough year for Target. Like most of the retail sector, it has been swamped by excess inventory thanks to supply chains speeding up and a misreading of consumer shopping trends, which have shifted away from goods to services like travel.
Target has already dialed down its guidance several times this year, and expectations are modest heading into the holiday season. However, it's a mistake to think the retailer can't recover and return to stronger growth as the company still has many of the competitive strengths that have made the stock a big winner over the last five years.
The company's investment in same-day fulfillment services like Drive Up have paid off in terms of sales and profits. Demand for same-day fulfillment skyrocketed during the pandemic and remains elevated, showing the habit among its customers has stuck. Unlike Amazon or Walmart, Target uses its stores to fulfill most of its online orders, which is cheaper to do and therefore more profitable. Its store footprint is also unmatched by any other multi-category retailers as the company has both small-format stores in high-density cities and big-box locations in the suburbs and rural areas. It continues to add new small-footprint stores, showing the model is resonating with its customer base, and the concept benefits from its strength in same-day fulfillment.
Target is driving profit growth through its private-label owned brands as well, which carry higher margins than name brands and enhance customer loyalty since they aren't available elsewhere. Target now has at least 10 billion-dollar owned brands, and continues to add new ones.
Over the long term, the company is targeting high-single-digit growth in adjusted earnings per share from next year forward, and it plans to continue growing its dividend, which now yields 2.8%.
While 2022 profits will be muted, the company trades at a price-to-earnings ratio of just 13 based on next year's expected earnings. That's a great price for a well-run retailer with a bounty of competitive advantages.
