You may not like what I’m about to say, but it’s nothing short of the truth: Bear markets are a normal and inevitable part of the investing cycle.
Last month, the technology-focused Nasdaq Composite briefly dipped into bear market territory with a peak decline of 22% from its all-time November closing high. While there are a number of plausible reasons behind the Nasdaq Composite’s big decline, the Federal Reserve’s monetary policy might just be the biggest culprit.
To be fair, no one ever said overseeing the monetary policy of the largest economy in the world by gross domestic product is easy. However, it’s become readily apparent, in hindsight, the Fed left its foot on the accelerator for far too long. The combination of historically low lending rates and quantitative easing measures (ie, long-term Treasury bond-buying and / or purchases of mortgage-backed securities) has helped push the prevailing inflation rate to a 40-year high. While some inflation is good for the economy, too much can stamp out growth in its entirety and send the US economy into a recession.
However, a Fed-induced bear market is no reason to run for the hills. On the contrary, with recessions and bear markets often resolving within a matter of months or a few quarters, big pullbacks are the perfect time to pounce. What follows are three beaten-down growth stocks that would be ideal to buy in a Fed-induced bear market.
The first fast-paced company that’s been beaten down and would make for a perfect buy in a Fed-driven bear market is cloud-based customer relationship management (CRM) software solutions provider Salesforce.com (CRM 1.83% ).
Without getting overly technical, CRM software is what consumer-facing businesses use to enhance their relationships with existing customers and grow their sales. If you have an issue with a product or service, CRM is used to stay on top of the problem and fix it. If you want to oversee an online marketing campaign, CRM software can help. And perhaps most importantly, if you want to run predictive sales analyzes to see which existing clients might purchase a new product or service, turn to CRM software.
When it comes to CRM software solutions, there’s Salesforce and everyone else. Through the first-half of 2021, Salesforce accounted for just shy of 24% of global CRM spend, according to a report from IDC. It’s the eighth consecutive year Salesforce has been the industry leader in CRM market share. Comparatively, No.’s 2 through 5 in share don’t even combine for a 20% market share.
The thing investors should understand is that when the economy contracts, businesses are probably going be even more likely to lean on software solutions that’ll boost sales from their existing customer base. Salesforce’s sustainable double-digit growth isn’t going to stop just because the Fed was overzealous with its monetary policy.
Another key to this company’s success is CEO Marc Benioff’s penchant for making earnings-accretive acquisitions. Some of the more notable buyouts include MuleSoft, Tableau Software, and most recently Slack Technologies. Aside from broadening the company’s revenue stream, these buyouts expand Salesforce’s ecosystem and launch new cross-selling opportunities.
According to Benioff, his company remains on track to nearly double its annual sales to $ 50 billion by fiscal 2026 (calendar year 2025). If that prognostication proves accurate, investors could snag one heck of a deal following this stock’s recent drubbing.
Green Thumb Industries
A second beaten-down growth stock that’s begging to be bought in a Fed-induced bear market is cannabis multi-state operator (MSO) Green Thumb Industries (GTBIF -0.63% ).
In February 2021, marijuana stocks were all the buzz on Wall Street. A Democrat-led Congress, coupled with Democrat Joe Biden taking the Oval Office, was expected to usher in federal legalization or, at the very least, federal cannabis banking reforms. Unfortunately, neither has taken shape and pot stocks like Green Thumb have taken it on the chin.
However, Wall Street appears to be overlooking the fact that the industry is performing just fine with individual states regulating their own weed industries. To date, around three-quarters of all states have legalized medical cannabis, with 18 of those states also green-lighting adult-use weed. That’s more than enough organic opportunity for MSOs to thrive.
What’s more, cannabis acted as a non-discretionary item during the pandemic. This is to say that even the worst of the COVID-19 pandemic / recession didn’t curb consumers from purchasing cannabis products. That bodes well no matter what the Federal Reserve does with monetary policy.
What makes Green Thumb such an intriguing buy is its product mix and state focus. As for the former, in the neighborhood of two-thirds of the company’s sales come from derivatives, such as beverages, edibles, dabs, vapes, and so on. The price point and margins for derivative pot products tend to be considerably higher than dried cannabis flower. Unsurprisingly, the company has delivered six consecutive quarters of generally accepted accounting principles (GAAP) profits.
The company has astutely chosen its markets, too. It had 77 operating dispensaries spanning 15 states, as of two weeks ago. While it’s piled into certain big-dollar markets, such as California, it’s also strategically built up its brand and following in limited-license states, such as Illinois. Limited-license states purposely cap the number of retail licenses issued in order to spur competition and ensure that each pot company has a fair shot to build up its brand (s).
Green Thumb’s forward-year price-to-earnings ratio of 27 might not appear “inexpensive” on the surface, but when you consider the company is growing sales by 20% to 25% annually, the stock looks like a screaming bargain.
The third beaten-down growth stock investors can confidently buy in a Fed-induced bear market is fintech company Block (SQ 4.59% ). Until this past December, Block was known as Square.
Shares of Block are down 57% on a trailing six-month basis (as of April 21, 2022), and are off even more going back its all-time high. Skeptics are clearly worried about the possibility of a recession and what that might do to both of Block’s core operating segments. But my suggestion would be to not worry so much about the next six-to-12 months and instead focus on everything Block continues to do right.
This company’s foundational operating segment continues to be its seller ecosystem. Based on the $ 42.6 billion in gross purchasing volume (GPV) registered by Square’s seller ecosystem in the fourth quarter, it’s pacing an annualized $ 170 billion in GPV. For some context, the seller ecosystem had just $ 6.5 billion in GPV traverse its network in 2012. That’s how quickly this segment has grown.
Most notably, the seller ecosystem isn’t just for small businesses anymore. Having access to point-of-sale solutions, loans, payment financing, and data analytics, has drawn larger businesses into its ecosystem. Businesses with at least $ 500,000 in annualized GPV accounted for 37% of total GPV in the fourth quarter. That was up nine percentage points from the same period in 2019. Since this is predominantly a fee-driven segment, bigger businesses equate to more gross profit.
But what has investors most excited is digital peer-to-peer payment platform Cash App. Over the past two years, Cash App’s gross profit has more than quadrupled to $ 2.07 billion. Meanwhile, the number of active users has ballooned from 7 million to over 44 million in four years’ time (end of 2017 to end of 2021). It’s worth noting that Cash App is bringing in $ 47 in gross profit per monthly active transacting user versus just a $ 10 cost to acquire each of these users.
Block also recently closed its transformative acquisition of buy now, pay later company Afterpay. This deal provides a way for the company to connect Cash App to its seller ecosystem to more rapidly grow both segments.
This is an innovative company that shouldn’t have any trouble delivering for patient shareholders.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.