Are you looking to make some serious cash in the next bull market? Look no further! Three experienced Motley Fool contributors have teamed up to outline their best stock ideas for the upcoming bounce.
Alphabet (GOOG -3.56%) (GOOGL -3.52%), Micron Technology (MU -0.57%), and LendingClub (LC -3.05%) are three outstanding stocks that have the potential to skyrocket when the current inflation-fighting market mood expires. With a combination of solid fundamentals, industry disruption, and a touch of calculated risk, these picks might just deliver wealth-building returns. Whether the market turns up in 2023 or not, this trio is poised to help your portfolio for the long haul.
So let's buckle up and see what these investing experts have on tap.
Digital ads are alive and well, and just waiting to pop higher
Nicholas Rossolillo (Alphabet): The downturn in the digital ads space has been an oft-repeated point over the last year, but I'll sound the alarm one more time. With the world headed toward (or perhaps already in) a recession, online marketing activity could be in for further slowdown in 2023. Alphabet -- which to this day still collects nearly 80% of its revenue from ads (Google search, YouTube, etc.) -- may not be a high-growth business in the immediate term as a result.
Then there's, of course, the curveball that OpenAI's ChatGPT tool presents. I think it's far too soon to say the artificial intelligence (AI)-powered conversational responses ChatGPT generates will be an internet search disruptor. After all, ChatGPT doesn't scour the internet for information like Google does. Rather, it generates responses based on past data it has been trained on. Plus, ChatGPT isn't being monetized yet. Perhaps OpenAI investor Microsoft will have some ideas to test out.
But at any rate, I think Alphabet remains in the top spot for digital ads for the foreseeable future, which means an eventual rebound in the global economy will mean a resurgence of the digital ads business. Along the way, Google Cloud is still kicking butt (sales up 38% year over year last quarter) and will eventually start kicking in some profits to fuel the Alphabet machine (Google Cloud operating loss margin narrowed to 10% last quarter, compared to a 13% loss last year).
If that isn't convincing enough, there's also the fact that Alphabet overall remains highly profitable (free cash flow of $62.5 billion over the last 12 months) and was sitting on cash and short-term investments net of debt of $102 billion at the end of September 2022. Alphabet is using that cash to repurchase massive amounts of stock as it returns excess cash to shareholders. That will pay off in spades whenever the next bull market arrives.
As of this writing, Alphabet trades for less than 19 times trailing-12-month free cash flow. This tech titan looks like a fantastic long-term value to me right now, and I think it could soar when the stock market's mood eventually improves.
The stuff that memories are made of
Anders Bylund (Micron Technology): The computer memory market is highly cyclical. The industry tends to run into oversupply situations where manufacturing facilities produce more memory chips than device makers can use, flooding the market with cheaper and cheaper chips. Next, you see excessive production cuts and rising chip prices until electronics builders are calling for relief. Changes in end-market demand also play into this cycle, often amplifying its effects.
You can set your watch by these cycles, roughly three years apart. It's easy to see the memory market's cyclical turns in the revenue chart of computer memory giant Micron Technology.
MU Revenue (TTM) data by YCharts
As you can see, the memory market recently completed a bullish cycle and is now heading south again. In this instance, sector leader Samsung is pumping out massive volumes of cheap chips, causing yet another price war across the industry.
Micron's stock already shows signs of this ongoing downturn, accelerated by the uncertain macroeconomic climate. The stock's price is down more than 40% from its all-time highs almost exactly one year ago.
One might think it would be a bad idea to buy Micron shares in the midst of a cyclical downswing. Why not wait until prices stabilize, revenue starts growing again, and everything looks good?
That's because investors have known about this sector's predictable swings for a long time, enabling them to predict future changes to some degree. So, generally speaking, you don't see Micron's stock rising after each upturn in the revenue chart, but a few months ahead of the sales curve. In other words, you should expect share prices to start rising before this price war actually ends:
MU Percent Off All-Time High data by YCharts
I'll admit that cyclical market swings are an inexact science and maybe more of an art. However, I've seen this movie play out five times in the last 15 years, and the plot tends to be quite similar every time. Based on that experience, Micron seems to be nearing the tipping point where the stock will skyrocket again for approximately a year and a half.
Furthermore, Micron's stock is attractively priced at 10.5 times trailing earnings and 2.2 times sales. That's also consistent with the patterns seen before earlier upswings.
I can't absolutely guarantee that this scenario will play out this spring, but Micron is almost guaranteed to take its next big jump before the end of the year. History suggests that it's better to swing early at these cyclical opportunities than wait too long and miss them entirely. So you might as well take action now.
This bargain-priced fintech is less risky than the market thinks
Billy Duberstein (LendingClub): Once inflation comes down and interest rates normalize, there's a good chance fintech stock LendingClub could take off again.
Along with the rest of the fintech sector, LendingClub sold off hard in 2022, falling 62% on the year. Yet while some of its peers have some very real problems, LendingClub's business model and profitability should enable it to withstand an economic downturn and thrive on the other side. In fact, LendingClub beat revenue and earnings expectations in every earnings report last year, even though its stock continued to fall largely based on macroeconomic concerns.
The game changer for LendingClub relative to its peers was its acquisition of Radius Bank back in early 2021. In the wake of that acquisition, LendingClub transformed from a pure marketplace that needed to constantly sell its personal loans to a hybrid bank model, in which it is able to not only sell loans, but also hold them on its balance sheet, backed by low-cost deposits.
As interest rates have risen at a rapid rate, loan buyers are pulling back from the market, as their demands for yields have gone up rapidly. Therefore, if you're a loan underwriting fintech platform that depends on third-party buyers, you have been under severe pressure over the past year.
LendingClub isn't immune from that pressure, as its loan buyers' return thresholds have gone up faster than LendingClub can adjust its APRs. Last quarter, LendingClub had to reduce its marketplace originations by 15% over the prior quarter. On the other hand, LendingClub was also able to increase the originations it put on its balance sheet by 13%, making up 33% of its originations.
If you think holding more loans could pose a risk, keep in mind that LendingClub has made a big effort to target prime borrowers over the past year in anticipation of tighter financial conditions. The average FICO score on LendingClub's held-for-investment portfolio is 730, with an average borrower income of $115,000. Meanwhile, the company seems to have conservatively reserved for losses, reserving 6.3% against all loans, with 7.2% reserved against its core unsecured consumer loan portfolio.
At the same time, LendingClub's 30-day delinquencies are only around 1% right now, which is well below the 2% to 2.5% range prior to the pandemic, which itself is far below LendingClub's reserve ratios. In addition, LendingClub's balance sheet has conservative capital ratios, with a CET1 ratio of 18.3% as of last quarter, nearly 50% higher than that of most large banks.
When the Fed eventually slows and/or pauses rate hikes, LendingClub's lagging rate increases will catch up with the higher cost of capital, which should reignite marketplace sales. Meanwhile, the held-for-investment portfolio could very well outperform the company's conservative reserve ratios, perhaps leading to reserve releases.
The stock has sold off to just 0.8 times book value and just 5 times this year's earnings estimates. That's a valuation reflecting a bad recession already, especially for a company so conservatively reserved and with still-bright growth prospects. Once inflation comes down or the recession ends, LendingClub could very well make an upward move back toward its late 2021 highs.
