Active investing leads investors to choose their favorite stocks. As long as your approach is based on identifying companies with growing revenue and rising returns, these sentiments can serve you well.
Unfortunately, investors can also pick their favorite stocks purely on emotional grounds. This can cause significant pain if they become attached to stocks with deteriorating financials or narrowing economic moats.
Thus investors probably serve themselves better by choosing favorites based on meaningful competitive advantages and improving financials. Such characteristics have helped make MercadoLibre (MELI 3.09%) and Shopify (SHOP 1.11%) my favorite stocks.
MercadoLibre
MercadoLibre has served as a disruptor in numerous industries in its home region of Latin America. It began by pioneering e-commerce services in the region.
However, Latin America is a cash-based society where large swaths of the population lack credit and debit cards. To facilitate shopping, the company launched Mercado Pago to provide prepaid cards and other services that allowed everyone to transact digitally.
This business was so successful that it began serving customers not buying on MercadoLibre. Moreover, the company repeated this approach with its shipping and fulfillment segment, Mercado Envios. Additionally, like Amazon, it leverages the presence of its site to sell online ads.
These MercadoLibre segments succeed both on their own and through synergies formed by working with one another. For those reasons, it grows and succeeds in a region often plagued by political instability and inflation.
That success seems to bolster the company's financials. In the first nine months of 2023, revenue of almost $10 billion was up 36% over a one-year timeframe. And slower increases in operating expenses helped boost profits. The net income of $822 million rose 159% during the same period.
The stock is up by more than 40% this year, taking the forward price-to-earnings (P/E) ratio to 69, a level that may seem somewhat elevated. However, assuming MercadoLibre's growth stays on its current path, it will likely become a favorite for more investors over time.
Shopify
The e-commerce platform business is competitive, but this has not stopped Shopify from bringing disruption. It stood out over competitors by offering an easily customizable, no-code site to draw customers.
Additionally, Shopify added additional services such as platforms for payments, online marketing, and inventory management. It also attempted to add fulfillment services that would have served as a significant differentiator. Unfortunately, the cost of building such a network forced it to exit that business.
Nonetheless, Shopify retained enough of its competitive advantages to become the No. 1 e-commerce platform in the U.S., according to BuiltWith. Also, without the financial burden of building a fulfillment network, Shopify's financials have improved dramatically.
In the first three quarters of 2023, its $4.9 billion in revenue grew 27% yearly. Shopify also kept the growth of most of its operating expenses in check, except for the $1.3 billion impairment charge related to the sale of its logistics business.
As a result, it reported losses of $515 million for the first nine months of the year. Still, this means it would have earned a positive net income during that time had it not been for the impairment charge, a point confirmed by the $708 million profit in Q3.
So far, the stock has risen 70% this year although it still sells at a 66% discount from its 2021 high. Even so, with its current stock price and the price-to-sales ratio of about 12, the recent increase in the stock and historically low valuation could signify a long-awaited recovery in Shopify stock.
