From artificial intelligence to renewed excitement in cryptocurrencies, there are a lot of phenomenal growth stories driving markets right now.
But as Warren Buffett just wrote in his 2023 annual letter to shareholders -- "For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants."
This word of caution doesn't mean that the factors driving the market are all wrong. It's just that when it comes to investing, it's vital to avoid hopping on a popular trade to make a quick buck. In the long run, a better approach is to focus on owning a piece of a quality business that can grow in value over time.
Here's why Lululemon (LULU 2.34%), Moderna (MRNA 3.25%), Apple (AAPL 2.04%), Ford (F 0.29%), and Roku (ROKU 4.42%) have what it takes to compound, and why each stock is worth buying in March.
Image source: Getty Images.
Stretch into the spring
Demitri Kalogeropoulos (Lululemon Athletica): Lululemon Athletica will announce its official fourth-quarter earnings update sometime in March, but investors don't have to wait until then to buy this stellar growth stock. The athleisure giant already offered some tantalizing hints about its growth trends to close out fiscal 2023, saying in early January that both sales and profits will land ahead of management's previous forecast. "We are pleased with our performance during the holiday season," CFO Megan Frank said in a press release.
Executives are now calling for Q4 sales to rise by about 14%, translating into a nearly 20% spike for the full year. For context, most Wall Street pros are looking for Nike to grow by just about 1% in 2024.
Lululemon is also stretching higher with respect to profit margins, meaning investors can expect to see much higher annual earnings over time. Gross profit margin is near 60% of sales, and operating profit has been holding above 20% of sales for the past two years.
On the downside, shares don't appear cheap heading into the March earnings update. You'll have to pay nearly 7 times annual sales for Lululemon's business, while you could own Nike for half that premium. There's a good chance Lululemon will earn its higher valuation by continuing to report fast growth and rising profits in 2024 and beyond. Those sales gains should come from its push into international markets and to demographics outside of its core female audience. Look for a steady flow of innovative product releases to support higher margins over time.
If you're risk-averse, you might want to just watch the stock for a potentially lower price to arrive. Yet Lululemon still looks attractive heading into the spring shopping season.
NASDAQ: LULU
Key Data Points
It's time to give this biotech stock another shot
Keith Speights (Moderna): Let me acknowledge right out of the gate that Moderna doesn't look like a promising pick at first glance. Shares of the biotech company have plunged 80% below the peak set in mid-2021 and have fallen close to 30% over the last 12 months. Moderna's revenue continues to sink due to declining demand for its COVID-19 vaccines.
NASDAQ: MRNA
Key Data Points
However, I think it's time to give this biotech stock another shot (pun fully intended). Why? Moderna appears to be on the threshold of a major comeback.
The U.S. Food and Drug Administration (FDA) set a PDUFA date of May 12, 2024, for an approval decision on Moderna's respiratory syncytial virus (RSV) vaccine mRNA-1345. This RSV vaccine should be a commercial success if approved, considering its solid efficacy and pre-filled syringes, which save doctors and pharmacists time.
Moderna also hopes to launch mRNA-1345 in Australia and Germany later this year. It plans to expand into additional markets in 2025.
Thanks largely to the anticipated boost from its new RSV vaccine, Moderna thinks it will return to sales growth next year. The company expects to reach breakeven in 2026. But mRNA-1345 isn't the only potential growth driver on the way.
Moderna intends to file for regulatory approvals of its seasonal flu vaccine mRNA-1010 this year as well. Its pipeline features several other late-stage programs, too, including a combination flu/COVID-19 vaccine, a next-generation COVID-19 vaccine that's refrigerator-stable, cytomegalovirus (CMV) vaccine mRNA-1647, and cancer vaccine mRNA-4157. Moderna is partnering with Merck to test mRNA-4157 with blockbuster immunotherapy Keytruda in treating melanoma and non-small-cell lung cancer.
I predict Moderna will make much more money by the end of this decade than it does now and be highly profitable. For long-term investors looking for a great turnaround story, this biotech stock could be right up their alley.
Apple's best qualities are underappreciated by the market right now
Daniel Foelber (Apple): The simplest reason to buy Apple stock is that it is an above-average company trading at nearly the same valuation as the S&P 500. That's a 27.5 price-to-earnings (P/E) ratio for the index and 28 for Apple.
There are a few reasons why Apple isn't getting the same market premium as other tech stocks. The simplest is its near-term growth prospects.
AAPL PE Ratio (Forward) data by YCharts
As you can see in the chart, the forward P/E ratios of some of the higher-flying big-tech-related stocks are significantly lower than the current P/E. In Nvidia's extreme case, earnings are expected to double in a single year, which is why the forward P/E is about half of the current P/E. With Apple, the two metrics are almost identical.
If you're a short-term trader, there's no reason to buy Apple stock now. And it's important to remember that stock prices can take wild swings based on sentiment and emotion.
But if you're a long-term investor, which is a far more successful method for compounding wealth over time, there's a lot to like about Apple that the market may be discounting right now.
Its recent quarter featured slowing growth in China, which is concerning. But North America, emerging markets like India and South Korea, and other parts of the world are doing well. Apple's high-margin services segment continues to be a key part of the long-term growth story.
Apple also has very little debt net of cash relative to its size. And it generates plenty more money than it needs to run the business. This is a company that bought back over $20 billion of its own stock last quarter. On average, that's over $222 million spent on stock buybacks per day!
There are very few companies out there with that level of financial muscle to deploy at will.
Apple is a phenomenal business with a powerful brand, streamlined vertical integration, a rock-solid balance sheet, and plenty of capital it can use to accelerate growth if it wants to. The valuation makes sense relative to the market, and that's why Apple is worth buying in March.
NASDAQ: AAPL
Key Data Points
Ford is a no-brainer stock to buy now
Neha Chamaria (Ford Motor): After a pretty volatile 2023, Ford stock has picked up some slack lately, rallying nearly 18% in the past three months, as of this writing. Labor strikes, rising costs, high interest rates, and an electric vehicle (EV) business losing billions of dollars even as fears of a global industry slowdown loom large were some of the bigger reasons why investors stayed on the sidelines on Ford stock last year. As it turns out, the latest developments at Ford have renewed investors' faith in the legacy automaker, and I believe this is a great time to buy the stock for the long haul.
Despite all the challenges, Ford grew its revenue by 11% in 2023 and turned a net profit of $4.3 billion, versus a net loss of $2 billion in 2022. Ford also declared a supplemental dividend for the first quarter as its adjusted free cash flow of $6.8 billion surpassed targets.
Even so, CEO Jim Farley emphasized how Ford is "nowhere near" its earnings potential yet, and he believes the company is well-positioned for growth this year. One of the key drivers should be Ford Pro, the company's commercial vehicles division, which generates substantial recurring revenue from hardware, software, and services businesses. In 2024, Ford expects Ford Pro to generate the highest earnings before interest and tax (EBIT) of around $8 billion to $9 billion among all its three divisions, with Ford Blue -- its gas-and-hybrid vehicles segment -- coming in a close second. Its EV business, Model e, could lose as much as $5.5 billion in EBIT in 2024.
Ford knows EVs are a challenging market, so it now wants to cut down capital spending on EVs until the time is right and focus instead on the higher-margin Pro and Blue businesses. This move alone reflects Ford's agility, and it is commendable that the company is still projecting flat to 15% growth in adjusted EBIT this year despite the massive expected losses in EVs. So Ford continues to grow despite challenges and is making the right moves to boost its earnings, making it a great stock to buy now for 2024 and beyond.
NYSE: F
Key Data Points
Why Roku's recent stock drop signals buying the stock in March
Anders Bylund (Roku): Roku's recent stock drop is an inviting investment opportunity in my eyes.
The media-streaming technology expert's fourth-quarter earnings report inspired a 24% stock price drop the next day and a 33% decline three days later. Market reactions like these usually follow a disappointing earnings report with weak results and a gloomy near-term market view. But none of those bearish components showed up in Roku's report.
The headline results were roughly in line with Wall Street's consensus estimates, with a 2% upside surprise on the top line. But the crucial category of ad buyers in the media and entertainment (A&E) industry is not springing back to generous marketing campaigns, limiting Roku's growth prospects over the next quarter or two.
Then Walmart threw more cold water on Roku's stock chart with the acquisition of smart TV buyer Vizio. If that deal is approved and completed, it'll take away an important software customer from Roku's roster and boost Vizio's business prospects with a deep-pocketed parent company. So Roku's stock took another dive as investors absorbed the implications of a Walmart-Vizio combination.
But Roku's bears are jumping to the wrong conclusions.
You see, Roku's modest revenue growth and negative earnings in recent quarters resulted from management's calculated choices. While other media-streaming hardware and software providers battled the inflation crisis by raising their prices, Roku held its price tags steady to attract more users instead.
So the user count grew from 60 million to 80 million active customers in two years, knee-deep in the inflation bog. Using cheap hardware as a loss-leader marketing trick worked wonders, and I think it's a smart investment. Sustained earnings can wait, as long as Roku is focused on building the largest possible user base for a lucrative long-term future.
Long story short, I found Roku's fourth-quarter report inspiring, and the price drop that followed simply opened the buying window a little bit wider. As for the Walmart plus Vizio threat, Roku is no stranger to tackling larger and richer rivals. Meanwhile, connected TV security expert Pixalate reports that Roku's share of the ad market on North American smart TVs rose from 50% in February 2023 to 55% one year later. It's not even a close race.
So I bought more Roku shares after the price drops in February and might come back again in March. Do your own research and see where you stand on this stock's bull-to-bear scale -- but the time to act is now if you agree with my analysis.
