Whether you’re a seasoned investor or just getting started, it’s never fun to see your holdings lose value. But if you’re investing in growing companies with plenty of opportunities to expand over the long term, you can sleep well knowing that your investments will eventually bounce back.
With that in mind, here’s why three Motley Fool contributors selected Poshmark ( NASDAQ:POSH ), Lululemon Athletica ( NASDAQ:LULU ), and Chewy ( NYSE:CHWY ) as great stocks to buy during the current market sell-off. Image source: Getty Images. A small-cap stock with great long-term return potential
John Ballard (Poshmark): The secondhand clothing market is expected to grow at a compound annual rate of 39% through 2024, outpacing the growth of the broader apparel market and reaching $64 billion in annual spending. The growth of this market puts a growing secondhand marketplace like Poshmark in the sweet spot.
The company just completed its initial public offering earlier this year, and the stock hasn’t performed that well, down 75%. But investors shouldn’t mistake a falling stock price with the actual business performance, because Poshmark is doing great. Revenue in the first half of 2021 is up 31% year over year, which is consistent with the growth projection of the secondhand market. The stock’s decline can be attributed to a high valuation at the time of the IPO, when the stock traded at a price-to-sales ratio of over 20. The business is continuing to grow as the stock falls, making now a good time to consider buying shares.
Poshmark has an advantage in that it carries no inventory. It makes money from charging a 20% fee on the final sale price of items over $15, or a flat $2.95 for items under $15. This should play to its advantage in the near term, given the supply chain disruptions caused by the pandemic. This asset-light model also means it relies on a diverse community of sellers to create a flexible marketplace that can adapt to the latest style preferences, which brick-and-mortar stores don’t have the luxury of doing. This positions Poshmark to gain market share over the long term.
The company is still expanding into new categories and geographies. It now offers a pets category and recently launched in India, where there are over 622 million internet users.
The stock’s decline has brought the company’s market cap down to $1.85 billion on $300 million of trailing-12-month revenue. That’s a price-to-sales multiple of 5.7, which should be more attractive to investors. Poshmark has become a popular place for millennials and Gen Z to shop, so I don’t expect the stock to stay down forever. An online retail company that’s making sure pets stay fed and healthy
Parkev Tatevosian (Chewy): Chewy is an online pet retailer that benefits from the long-running trend of sales moving away from brick-and-mortar stores. It sells several products for pets, including fresh food, dry food, toys, beds, medication , and more. Chewy also offers a free telehealth service to customers who use its autoship feature.
Revenue is growing, more than tripling from $2.1 billion in 2018 to $7.1 billion in 2021. The growth results from a combination of factors such as an increasing share of spending moving online, an increasing selection of items on the platform, and millions of new customers.
The good news for investors is that Chewy’s growing revenue is expanding its profit margin. From 2016 to 2021, the gross profit margin rose from 16.6% to 25.5%. As with most e-commerce retailers, profit margins can develop further as order sizes get bigger. That way, the company can ship packages with greater contents, and the shipping cost in relation to order value will be more negligible.
Moreover, pet spending is consistent for the most part. Folks are not likely to decrease spending on their pet’s food if their income drops. Sure, they may not splurge on a new chew toy, but food and especially medications are likely to stay within the budget. That could mean, in a stock market crash, Chewy’s stock can be had at a lower price while its business prospects remain relatively unchanged. That’s precisely the type of stock investors should look for in a crash — one where the price has dropped because of a market panic, but otherwise, whose business remains unchanged.
Chewy is not yet profitable on the bottom line and is trading at a price-to-sales ratio of 3.8. And during a market crash, it can probably be had at an even more favorable price . Sweating its way to the top
Jennifer Saibil […]
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