Sometimes things don't go as planned. That's been the story for investors in 2022, with all three major U.S. stock indexes tumbling into respective bear markets. None of the major stock indexes have been hit harder than the technology-driven Nasdaq Composite (^IXIC -0.51%), which has lost around a third of its value since the year began.
But when fear rules the roost on Wall Street, opportunity rears its head. Although there's no telling when a bear market will occur, how long it'll last, or how steep the decline will be, one thing for certain is that every notable decline in the major stock indexes throughout history, including the Nasdaq, was eventually recouped (and then some) by a bull market rally. This makes bear markets the opportune time for investors to put their money to work.
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The Nasdaq bear market can be an especially smart time to buy into industry leaders that have been beaten down. What follows are three industry-leading stocks that have the capacity to double your money by 2025 if purchased during the 2022 Nasdaq bear market.
Alphabet
The first industry leader with double-your-money potential by mid decade is Alphabet (GOOGL 0.45%) (GOOG 0.55%), the parent company of internet search engine Google.
Like most of the FAANG stocks, Alphabet has been clobbered this year. Shares of the company have tumbled 38% as the likelihood of a U.S. recession grows. That's a concern for Alphabet given that a majority of its revenue comes from advertising. Ad spending is usually one of the first things to be hit when the U.S. or global economy contracts.
What makes Alphabet an industry leader is Google. Based on data provided by GlobalStats, Google has accounted for no less than 91% of worldwide internet search share on a monthly basis looking back three years. Google is effectively a monopoly for Alphabet, which is why the company benefits from exceptional ad-pricing power during long-winded periods of economic expansion. There's nothing to suggest this search engine dominance is going to fade anytime soon.
Of course, there's more to Alphabet than just its search engine cash cow. For instance, streaming platform YouTube is the second-most-visited social site in the world, and has provided one heck of a return on investment since being acquired for $1.65 billion in 2006. Alphabet is currently deploying tools to better monetize YouTube Shorts, which are short-form videos lasting less than a minute.
Alphabet also has an opportunity to continue growing its global share of the cloud infrastructure service market. A third-quarter report from Canalys estimates Google Cloud increased its share of worldwide cloud spending to 9%, which makes it the global No. 3 provider. Traditionally, cloud-service margins can run circles around advertising margins. Presumably, this gives Alphabet a means to significantly expand its operating cash flow by mid decade.
If you need one more solid reason to believe Alphabet stock can double, consider that it's cheaper now than it's ever been as a publicly traded company. Alphabet has been valued at an average multiple of 19 times cash flow over the past five years. Investors purchasing shares right now are getting Alphabet at a multiple of 7 times Wall Street's forecast cash flow for the company in 2025.
Cresco Labs
A second industry leader that can double your money by 2025 in spite of the Nasdaq Composite plunging is U.S. marijuana stock Cresco Labs (CRLBF -4.73%). Cresco's qualification as an "industry leader" has to do with its wholesale operations, which I'll touch on a bit later.
All pot stocks, including Cresco Labs, have been absolute buzzkills in 2022. Shares of Cresco have shed 61% of their value (through Dec. 16, 2022) due to a lack of cannabis reform progress on Capitol Hill. With the SAFE Banking Act, once again, not included in the annual national defense bill, the prospect of federal legalization or banking reform remains as grim as ever.
However, marijuana stocks don't need federal legalization to thrive. Approximately three-quarters of all states have legalized medical marijuana, with 21 of those states also allowing adult-use consumption and/or retail sales. That's plenty of opportunity for multi-state operators (MSOs) to grow their sales and bring in the green.
What really helps Cresco Labs stand out is its aforementioned leading wholesale operations. Wall Street isn't the biggest fan of wholesale cannabis given that the margins associated with wholesale are well below those of traditional retail sales. Thankfully, Cresco Labs has volume very much on its side. It holds one of only a few cannabis distribution licenses in California (the No. 1 state for weed sales), and it's able to place its proprietary products into more than 1,200 dispensaries throughout the country. Even with lower margins than traditional retail channels, this leading wholesale segment can be a significant profit driver.
Beyond this wholesale segment, Cresco's other major catalyst is its pending all-share acquisition of MSO Columbia Care (CCHWF 2.40%). Last month, Cresco and Columbia Care announced the planned divestiture of a dozen aggregate dispensaries and production facilities spanning three markets. This divestiture is necessary to complete the Columbia Care deal and give the soon-to-be combined entity a presence in 18 states with more than 120 operating dispensaries. This deal should result in cost synergies and ultimately make Cresco Labs a more efficient MSO.
If Cresco Labs can turn the corner to recurring profitability in 2023, it should have no trouble doubling in value by mid decade.
Image source: Getty Images.
Meta Platforms
The third industry leader that can double your money by 2025 despite being beaten down by the Nasdaq bear market is social media stock Meta Platforms (META 1.54%). Meta is the company behind social media destinations Facebook, Instagram, and WhatsApp.
Similar to Alphabet, Meta Platforms has been crushed on the prospect of weaker ad spending this year and in 2023. During the third quarter, Meta generated a little over 98% of its revenue from advertising.
The other issue for Meta is its aggressive spending on Reality Labs, the company's metaverse segment. CEO Mark Zuckerberg hasn't signaled a willingness to pare back spending on Reality Labs, even as ad spending weakens. The end result is a $9.4 billion loss from this operating segment through the first nine months of 2022.
But what skeptics are overlooking is just how dominant Meta's social media assets are. Based on figures from DataReportal, Facebook (2.93 billion), WhatsApp (2 billion), Instagram (1.39 billion), and Facebook Messenger (976 million), are the respective No. 1, 3, 4, and 6 in terms of global active users. There's not an alternative platform advertisers can go to for a more diverse or targeted set of eyeballs than Meta's social media assets.
This is a good time to mention that recessions and economic slowdowns typically last for no more than a couple of quarters. By comparison, periods of economic expansion are measured in years. Although ad-pricing power is weak for Meta at the moment, investors are historically far too pessimistic about ad-driven stocks during these short-term lulls in growth.
Meta is also sitting on a treasure chest. Even with plenty of cash being diverted to Reality Labs, the company ended the most recent quarter with close to $32 billion in net cash, cash equivalents, and marketable securities. In other words, it has the luxury of being able to invest in the metaverse thanks to its highly profitable advertising operations and cash-rich balance sheet.
Over the past five years, investors have willingly paid an average multiple of 17 times cash flow to own shares of Meta. But if it achieves Wall Street's consensus cash flow estimate come 2025, you'd be buying shares now for just 4 times cash flow.
