3 Top Stocks to Buy Before the New Year

Investors have struggled to shield themselves from the broad downward trend in the stock market this year, as high inflation and rising interest rates have sent share prices tumbling. But what if those two factors are slowly fading? U.S. inflation, for example, has now declined for four straight months, and if that trend picks up momentum into the new year, then 2023 could feature far more positive conditions for investors.

We asked three Motley Fool contributors to identify beaten-down stocks that they think could turn around in that scenario, and they pointed us to Redfin (RDFN 3.50%), Semrush (SEMR -0.93%), and Shopify (SHOP -0.11%).

Redfin is transforming its business

Anthony Di Pizio (Redfin): Real estate stocks may be among the least appealing investments you can hold when interest rates are rocketing higher. Illustrating that point, Redfin's share price has declined 95% from its all-time high as mortgage rates have surged upward. But if peak inflation is truly behind us and interest rates will soon stabilize, then the company offers a really attractive value proposition, especially since it has dramatically cleaned up its business this year. 

For example, management recently decided to shutter RedfinNow, its iBuying business, which purchased homes directly from willing sellers to flip them for a profit. But it didn't always work out that way, particularly as the real estate market began to deteriorate, so Redfin rightly decided it was time to move on. This will improve the company's bottom-line results by narrowing its net losses.

Redfin can now focus more on its brokering business, which is where its expertise lies. The company has amassed a sales force of more than 2,200 lead agents who cover 96% of the U.S. housing market (by population). That scale allows Redfin to charge listing fees of just 1% compared to the industry-standard 2.5%, and it has saved its sellers over $1 billion since the company's inception. People are more concerned about cutting their costs during times like these, and Redfin's market share has steadily ticked higher as a result. 

Despite all of the challenges the company has faced in 2022, it remains on track to generate over $2.2 billion in revenue for the year,  a 17% jump compared to 2021. It's true that once the RedfinNow business is fully liquidated in mid-2023, the company's annual revenue figures may dip as it shifts back to relying solely on brokering and other real estate services like mortgages. The trade-off is that Redfin's bottom line should be much healthier, and it will be able to begin charting a path toward profitability.

At Redfin's current stock price of $4.90, the company is valued at just $530 million. Weigh that against its projected $2.2 billion in revenue this year, and the stock looks like an enticing risk-reward play going into 2023.

Get this unknown growth stock while it's cheap

Jamie Louko (Semrush): Two services that marketing teams can't live without are solutions that provide data to drive marketing decisions and tools that can enable effective marketing. After all, this data drives nearly all of the strategic decisions made, and these tools make it simple to put these strategies into action. Over 94,000 customers rely on Semrush for such tools and data. Since it has unique, first-party data on over 20 billion keywords and 200 million website domains (plus a lot more), Semrush could be deemed a mission-critical platform for marketing teams within their organizations.

This might be why the company has seen such robust results in 2022, despite the worsening macroeconomic environment. Revenue in the third quarter jumped 34% year over year to $66 million, and unlike other software companies, Semrush predicts demand for its offerings will remain steady through the end of 2022. For the year, revenue is forecast to increase roughly 35% to $253 million.

The company isn't completely immune to the impacts of this macroeconomic downturn, but it's showing resilience compared to other software service providers. Customers have slightly slowed the rate at which they are increasing their spending on Semrush -- its net retention rate dipped from 125% in the second quarter to 122% in the third. However, given the criticality of the company's services, its churn remained stable quarter over quarter. 

Larger customers, which are traditionally less sensitive to economic downturns than small businesses, presumably subsidized this stability. Last quarter, the number of customers spending $10,000 or more annually on its platform soared 70% year over year and 12% sequentially.

Shares now trade at a valuation of 5.7 times sales -- far below many other fast-growing tech stocks. The market sell-off has created many bargains, and Semrush is one of them. Consider grabbing a few shares before 2023 to hold for the long haul.

Building the future of commerce

Trevor Jennewine (Shopify): E-commerce company Shopify reported underwhelming financial results for the third quarter. Revenue rose 22% year over year to $1.4 billion, but operating expenses climbed more quickly, leading to a GAAP loss of $0.12 per share. That represented a sharp deterioration from the same quarter last year, when revenue soared 46% and Shopify reported a GAAP profit of $0.90 per share.

However, the economy looks a lot different today than it did a year ago. Many retailers have struggled as consumer demand softens amid the inflationary environment, and Shopify is not immune to macroeconomic headwinds. But its growth story is still intact, and the investment thesis remains unchanged. Shopify is the market leader in e-commerce software, and global retail e-commerce sales are expected to grow at a 10%  annualized rate to reach $7.4 trillion by 2025.

Better yet, Shopify has an edge over retailers like Amazon and Walmart. It provides software and services that empower businesses to engage consumers across multiple sales channels. Its platform integrates with online marketplaces like those operated by Amazon and Walmart, but it also supports brick-and-mortar stores and direct-to-consumer websites, giving merchants more flexibility to build lasting buyer relationships.

In a nutshell, Shopify is already well-positioned not only to grow its business but also to take market share. Meanwhile, management is making smart moves that should create value for long-term shareholders. Those moves include the construction of the Shopify Fulfillment Network, which will ultimately enable its merchant clients to offer two-day delivery across the U.S. They also include its geographic expansion efforts. In the third quarter, Shopify introduced payment processing services in several more European countries, bringing its total to 22. It launched its financing service in Australia -- that's now available in four countries. And it debuted its point-of-sale platform in Singapore and Finland, bringing it to a total of 14 countries.

With that in mind, shares of Shopify currently trade at 9.3 times sales, an absolute bargain compared to their three-year average of 36.1 and a reasonable price to pay for a business poised to reaccelerate growth when the economic climate becomes more favorable. That's why this growth stock is worth buying right now.