Since hitting lows last October, the broader stock market has made strides to the point that some analysts are declaring this a new bull market. This shift in market sentiment could be a big turning point for investors moving forward.
A bull market often whets investors' appetite for risk, which means some beaten-down, less-established stocks could be big winners moving forward. The key is to identify them early.
The smartest investors are tracking these diamonds in the rough before the masses flock to them. Here are three examples that have the improving fundamentals needed to spark huge long-term returns.
These three growth stocks have long journeys ahead
Financial growth stocks like Sofi Technologies (SOFI 3.69%), Upstart Holdings (UPST 2.76%), and Lemonade (LMND 1.64%) have all rallied hard over the past two months, but a quick look below will show you how little these moves have meant in the bigger picture:
Names like Upstart and Lemonade must still rise roughly tenfold from these prices to return to their former highs. I'm not saying this will happen overnight, or even in the next year. But it has real potential to happen. Let's review each of these stocks to highlight why these companies could be compelling long-term investments.
SoFi Technologies' best business is back in business
The upcoming end to the student loan freeze is a big boost for digital bank SoFi Technologies. The company refinances a lot of student loans. Loan volume was $6.7 billion in 2019, which dropped to $2.2 billion in 2022. The resumption of payments this fall should spark students to refinance for lower rates or smaller monthly payments to help keep up with living expenses.
But SoFi is not a one-trick pony; the rest of SoFi has thrived over the past several years despite its shrinking student loan business.
SOFI Revenue (TTM) data by YCharts
The company's member base has grown from 1 billion in Q1 of 2020 to 5.6 billion in just three years. SoFi offers users a smartphone super app where they can bank, save, make payments, invest, and work on their credit. It's a digital sales funnel because users can start with SoFi for one product (such as their student loans) and gradually explore additional products. The resumption of student loan repayments could juice SoFi's growth, which is already stellar due to its success in picking up new members.
Upstart's crucial pivot
The Federal Open Market Committee (FOMC) raised the Federal Funds Rate at one of the fastest paces in history last year. That wreaked havoc on Upstart Holdings, which uses artificial intelligence (AI) to approve borrowers for loans. Interest rates rose so quickly that some of Upstart's loans got trapped with poor unit economics, which caused management to stockpile them on Upstart's balance sheet. Loans held on its balance sheet swelled to roughly $1 billion in just a few quarters, choking Upstart's ability to take on more loans, ultimately slowing growth and tanking profits.
UPST Revenue (TTM) data by YCharts
But the company could be on a path to redemption. Management has made it a point to accumulate committed funding, meaning buyers that are pledging capital to buy loans ahead of time, so the company can approve loans with the certainty that it has buyers ready to take them off its hands. Interest rates also appear near their near-term height, which could also get Upstart's business firing on all cylinders in the near future. Upstart's expanding partner network and new product potential make the stock a speculative long-term idea with a compelling upside.
Lemonade's AI models are making strides
Insurance is a massive industry that's been around for a long time. The incumbent insurers that dominate the field have deep pockets and loads of data. Yet Lemonade, which wasn't founded until 2015, is trying to establish its footing. The company is forgoing the traditional agent-based business model with AI chatbots that can quickly handle sales and claims through a smartphone app. Lemonade's small size and inferior underwriting metrics (loss ratio) led to skepticism among investors last year.
LMND Revenue (TTM) data by YCharts
But Lemonade's improving performance could show investors that the company isn't just a fad. The company's gross loss ratio has improved from 121% in Q1 of 2021 to 87% in two years. A lower ratio means that the company is paying out less in claims than what it collects in premiums from customers. Additionally, customers seemingly enjoy Lemonade's user experience; user growth is strong at 1.8 million as of Q1, up 23% year over year. Investors should keep an eye on the company to see that user growth continues and loss ratios keep improving. If that happens, there's no reason this company's $1 billion market cap can't get much bigger over the coming years.
