As much as we'd like the stock market to rise in value every year, corrections, crashes, and bear markets are a normal part of the investing cycle.
Last year, all three major stock indexes fell into respective bear markets, with the growth-driven Nasdaq Composite (^IXIC -1.15%) getting hit hardest. Whereas the Dow Jones Industrial Average, which is packed with generally mature, profitable businesses, ended 2022 down "just" 9%, the Nasdaq Composite shed 33% of its value.
Image source: Getty Images.
But when there's short-term pain on Wall Street, there's almost always opportunity for investors. The Nasdaq bear market is a particularly intriguing time for millennials -- people born between 1981 and 1996 -- to put their money to work. Since millennials have multiple decades of investing runway in front of them, an assortment of innovative, industry-changing growth stocks can be the recipe for serious wealth creation.
What follows are three perfect stocks for millennials to buy hand over fist during the Nasdaq bear market.
PayPal Holdings
The first surefire stock for millennials to load up on during the Nasdaq bear market decline is fintech juggernaut PayPal Holdings (PYPL -0.27%).
Like most growth stocks, PayPal has been clobbered since late 2021 for a variety of reasons. The U.S. inflation rate hitting a four-decade high in June 2022 served as a warning that low-earning workers may have less spending power, which could lead to fewer transactions on PayPal's digital peer-to-peer networks. Also, the growing likelihood of a U.S. recession would almost certainly reduce consumer purchasing activity.
However, neither of these concerns impact PayPal's long-term growth strategy or innovation, as evidenced by the company's operating results and corporate actions.
When the closing bell tolled in 2022, the total payment volume traversing PayPal's digital networks hit $1.36 trillion. On a constant-currency basis (i.e., excluding currency movements), this was a 13% improvement from the previous year. What's impressive is this double-digit growth was achieved with the U.S. economy producing two consecutive quarters of gross domestic product declines to begin 2022.
Arguably, even more important is the fact that customer engagement continues to climb. Active accounts averaged 51.4 transactions over the trailing-12-month (TTM) period, ended Dec. 31, 2022. That's up from just 40.1 transactions over the TTM at the end of 2020. The vast majority of PayPal's operating model is built on fees. In other words, more transactions from its core customers is precisely the formula for PayPal to grow both its sales and profits.
While sustained growth and digital payment dominance are two solid reasons for millennials to buy PayPal stock and hold on for a long time, the company's capital-return program shouldn't be overlooked, either. CEO Dan Schulman, who'll be retiring at the end of this year, announced a $15 billion buyback program last summer. Since the beginning of 2016, PayPal has repurchased approximately $16 billion of its own stock, with billions more still to come. These buybacks can lift earnings per share and make fundamentally cheap stocks appear all the more attractive.
Lovesac
A second perfect stock for millennials to buy as the Nasdaq Composite plunges is furniture company Lovesac (LOVE 4.29%).
The traditional furniture industry is slow growing and almost entirely reliant on foot traffic into physical stores. Further, most furniture retailers tend to buy their products from the same small group of wholesalers, leaving little room for differentiation. Small-cap stock Lovesac provides the differentiation, utility, and omnichannel presence that makes it a special company in an industry ripe for disruption.
In Lovesac's early days, it was well known for its beanbag-styled chairs called sacs. Today, just shy of 90% of its net sales derive from "sactionals" -- modular couches that can be rearranged dozens of ways to fit most living spaces. Buyers can choose from over 200 different cover options with sactionals, as well as upgrade their sactional to include wireless charging stations and/or surround-sound systems.
What's more, the yarn used in sactional covers is made entirely from recycled plastic water bottles. Roughly 966 recycled plastic bottles are repurposed for a standard sactional. This is a particularly important point, given that millennials are more likely to make environmentally conscious choices and purchases than older generations. Not surprisingly, Lovesac's target customer is millennials aged 35 and above.
Another way Lovesac has stood out from the retail furniture crowd is through its omnichannel sales platform. Even though it has physical stores in 40 U.S. states, Lovesac has relied heavily on a combination of direct-to-consumer sales, pop-up showrooms, and brand-name partnerships to move its products. Having multiple channels to sell sactionals have helped reduce its overhead expenses and lifted its operating margin.
This is also a good time to mention that Lovesac's core customer finds themselves in the middle-to-upper-income category. Folks with higher incomes are less likely to alter their buying habits due to inflation or modest economic weakness. In short, Lovesac should be able to weather economic downturns better than its peers.
It's not often you'll find sustained double-digit growth potential from a furniture stock, but it's exactly what you'll get with Lovesac.
Image source: Getty Images.
Upstart Holdings
The third perfect stock for millennial investors to buy hand over fist during the Nasdaq bear market is cloud-based lending platform Upstart Holdings (UPST -0.44%).
If you thought PayPal's stock chart looked rough, take a closer look at Upstart, which has retraced about 96% from its 2021 all-time high. The most front-and-center worry with Upstart is interest rates. With the Federal Reserve increasing interest rates at the fastest pace in four decades, loan application demand has fallen considerably. Upstart has yet to prove to Wall Street that it can navigate an extended recession.
On the other hand, Upstart, like Lovesac, is taking an industry that's ripe for disruption and completely turning it on its head.
Traditionally, the loan-approval process is time-consuming and costly. Upstart is changing this by leaning on artificial intelligence (AI) and machine learning. Instead of utilizing the same methods that have been employed for decades, Upstart's platform has been able to provide relatively fast and entirely automated approvals for 75% of the applications it processes. Rapid approval is a benefit for applicants, and it saves money for the company's roughly seven dozen bank and credit union partners.
But the advantage Upstart offers its lending partners isn't just limited to time. According to data from the company, Upstart approvals have lower average credit scores when compared to the traditional loan-vetting process. This means people who've been previously shut out of the traditional loan process are getting a chance with Upstart and its lending partners.
The interesting thing is that the delinquency rate between Upstart's platform and the decades-old method have been similar. The key takeaway is that Upstart can bring banks and credit unions new clients without adversely impacting their credit-risk portfolios.
Something else to note is that Upstart's addressable market is massive compared to what it's been primarily focused on for years. According to data from TransUnion, annual personal loan originations total $146 billion. This is where Upstart has made its home. However, it's begun shifting its attention to auto loan originations, which is a $786 billion market.
If Upstart spreads its wings to new verticals during extended periods of economic expansion, the result should be more lending partners and higher profits.
