3 Stocks to Add to Your Portfolio in a Market Pullback

With the S&P 500 up more than 18% this year, it's getting very close to surpassing its previous high, which is about 5% above current levels. When that happens, we'll be back in a bull market. On average, valuations are just getting back to normal. The S&P 500's price-to-earnings ratio stands at 23 right now, which is a typical pre-pandemic valuation.

Still, some stocks do look a bit overvalued at this point even though the underlying companies have some wonderful businesses. Three in that category right now are Shopify (SHOP 1.11%), MercadoLibre (MELI 3.09%), and Nu Holdings (NU 1.66%). In the event of a market pullback, you'll want to load up on these stocks.

1. Shopify: powering e-commerce

For any e-commerce company whose name isn't Amazon, getting online can be a challenge. Shopify offers tools and packages to make it a cinch, with turnkey websites and full payment options. It's no wonder it counts millions of clients and keeps growing.

Although it's known as the go-to resource for small businesses, it has made a big push to attract midsize businesses as well. This is a lucrative segment that pays for larger, more expensive, and more profitable packages. 

What's most compelling to me about Shopify's story is the range of products and services that can fit any customer's needs. That's how it has managed to capture so many clients, whether it's for a full workup or only for some services. For example, its new Commerce Components product lets customers choose and buy specific Shopify services that can be easily integrated into their website or physical store operations.

Shopify has had a few slip-ups as it over-built its infrastructure early in the pandemic, but it has continued to post robust revenue growth. It's now in the process of phasing out the overbuild and is making progress in achieving stronger results. In its 2023 first quarter, revenue increased 25% over last year. That's promising considering how customers have been scaling back digital shopping and spending more on real-life experiences.

Although operating losses widened from $98 million last year to $193 million this year in the first quarter, investors cheered the company's decision to sell its logistics network. That's a great step toward getting back into better financial shape.

Shopify stock is up 89% this year, and shares trade at 14 times trailing-12-month sales. That's a rich valuation. But Shopify has a huge opportunity ahead, and investors should grab the stock in a market pullback.

2. MercadoLibre: High growth, strong profits

MercadoLibre has been an exceptional growth story, and it keeps getting better. The company operates an e-commerce business similar to Amazon in Latin America, but it has expanded into fintech as well.

Revenue increased 58% over last year in the 2023 first quarter. Its e-commerce business is still robust, and gross merchandise volume increased 43% over last year in the first quarter. Product listings by sellers increased 40% over last year, and there's still plenty of opportunity here.

But the larger growth is happening in the fintech segment, where revenue increased 64% year over year in the first quarter. Fintech services were created to allow customers who didn't have a bank to make purchases, but this segment has developed in several ways.

Notably, people are using the payment network for all kinds of purchases, and off-platform usage is growing at a faster rate than on-platform usage. Digital accounts increased 164% in the first quarter to more than 12 million, and off-platform total payment volume increased 120%. The segment now includes credit services as well, and the credit portfolio increased 26% over last year to more than $3 billion.

As MercadoLibre has scaled and invested strategically, net income hasn't always been positive, but it has been positive now for for the past five consecutive quarters. It came in at $201 million in the first quarter, almost doubling from $65 million last year.

With stellar results like these, it's easy to see why MercadoLibre stock should be a no-brainer. However, it's highly valued, trading at 100 times trailing-12-month earnings. That's more than a premium valuation. If the price goes down, it's a fantastic stock to buy.

3. Nu: Strong performance, enormous opportunity

Nu is a digital bank based in Brazil that's catching like wildfire. It already has close to half of the adult population in its home country as members, and it's posting massive growth in its newer markets of Mexico and Colombia. A third of the add-ons in the first quarter, or 1.5 billion, came from Brazil, where there's still plenty of opportunity.

Total members increased 33% over last year in the 2023 first quarter to reach 79.1 million, and revenue increased 87% to $1.6 billion. Members had already reached 80 million by April. Banking is robust as well. Deposits were up 34% in the first quarter over last year, while loans increased 54%.

The company has also been moving toward profitability, with $141 million in net income in the first quarter. This is well-illustrated through its cost to serve per active customer, which has stayed steady even as average revenue per active customer increases.

Nu could be an incredible stock to own, and it has even attracted Warren Buffett's eye. It's up 88% in 2023 and trades at a price-to-sales ratio of almost 11. That's expensive, but it could be reasonable given the opportunity. If the price falls, it's a no-brainer for a great stock to add to your portfolio.