The term "meme stocks" entered popular parlance during the pandemic when retail investors gathered together on some social media sites to drive certain stock prices through the roof. The pitfalls of such a scheme are that prices can become unsustainably high, and when they fall, many individual investors can get hit with staggering losses.
But not all meme stocks are bad investment choices. Some of the ones that looked risky a few years ago are demonstrating momentum and are on their way toward top-stock status. Carnival (CCL -0.66%) (CUK -0.88%), Lemonade (LMND 1.64%), and SoFi Technologies (SOFI 3.69%) all have massive long-term potential.
1. Carnival: The incredible recovery is happening
Carnival became a huge story in 2020 when operations essentially ceased as cruises were on hold. Carnival has enjoyed reliable growth and profits for years as the largest cruise operator in the world, so its predicament commanded rapt attention.
Shares dropped 74% from January to March in 2021, and then they rose 132% by June 2021 despite the company having zero revenue or earnings at that time. The price fell back again, although less sharply, and it's now climbing back as Carnival is demonstrating a sustained recovery.
The cruise line has posted record bookings for the past two quarters, and revenue is exceeding pre-pandemic levels. Sales of $4.9 billion were a second-quarter record in 2023, and $7.2 billion in customer deposits was an all-time high. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which measures the underlying health of core activities, came in at $681 million, above guidance, and management is expecting that to more than triple in the third quarter.
Carnival is getting back to its old self. Investors still need to consider that the company has a huge debt load after issuing debt and equity to stay alive when there were no sales. However, it's managing the debt quite effectively, and it's $1.4 billion off peak debt with more than $7 billion in liquidity.
It's also been buying back shares at a fast clip to undo some of the share dilution it created when issuing new debt. In short, it's paying attention to shareholder concerns and making progress toward healthier financials as it nurses its business back to growth.
Carnival stock is already up 95% this year and has come down from earlier highs. The recovery is now baked into the price, but that doesn't mean you've missed the chance to buy. It just means you missed the major jump.
But that's not what long-term investing is about anyway, and Carnival should revert to its previous strong performance and market outperformance over time.
2. Lemonade: Disrupting an established industry
Lemonade is an insurance company based on artificial intelligence (AI) that's racking up customers and proving to be more than a passing fad.
Investors were disappointed when losses mounted as it scaled up and its loss ratio didn't move in a linear down direction, but that's never what management said the company was about. It did predict that getting the company to good financial shape would take time, and it's still confident that's on the way.
Losses are still piling up, but they have narrowed, as management promised. The loss ratio, which measures how much of a policy amount Lemonade pays out in claims, is much lumpier. It improved, coming down in the first quarter to 86%, but worsened as it went back up to 94% in the second quarter.
Management says that for some of its older policies, it's much lower, such as 47% for renters insurance, its oldest product. It has explained in the past that newer products have higher loss ratios, and it will take time to bring those numbers down.
Lemonade stock soared more than 220% from lows in October 2020 to a high in February 2021, and it fell sharply after that. It's still down 92% from that high, but the model looks solid, and there could be huge rewards for patient investors.
3. SoFi Technologies: The same, but better
SoFi operates a digital financial-services platform with a focus on student loans and a younger demographic. It doesn't really offer anything that isn't already on the market, but in this case, it's the small details that count. It's very consumer-centric, with easy-to-use tools and low fees, and it offers the kinds of services that its target population is looking for these days.
This has resulted in strong engagement and a large amount of cross-selling and upselling. The company broadened its product selection to become a kind of one-stop shop, and the concept is resonating with customers.
Revenue grew 37% over last year in the third quarter, customer count rose by 584,000, and product adoption is increasing among existing customers. New products increased 43% over last year, or by 847,000, to more than 9.4 million.
Even better, profitability is improving, and management said it would be net profitable by the 2023 fourth quarter.
SoFi stock skyrocketed straight out of the gate, up nearly 190% two weeks after going public. It's now down 79% from those highs and trades at 2.6 times trailing-12-month sales, which is a bargain price for a stock with its incredible opportunities nearing profitability.
