Whether you are a new investor or a seasoned investor, the stock market has sent a clear message over the past four months that corrections are an inevitable part of the investment cycle.
Since the beginning of the year, the reference S&P500 and iconic Dow Jones Industrial Average entered correction territory with respective declines of at least 10%. Things have been even worse for growth-oriented companies Nasdaq Compound (^IXIC -1.12%), which has fallen 23% since hitting its all-time high in November. This officially places the Nasdaq in its prime bear market since the collapse of the pandemic in March 2020.
Although big drops in major indices can be scary at times, history has shown that now is the perfect time to put your money to work. Every major index, including the Nasdaq Composite, ends up ignoring every correction.
Additionally, growth stocks can be one of the smartest places to invest your money during a correction or bear market. A Bank of America/The Merrill Lynch report that examined the performance of growth stocks and value stocks over 90 years (1926-2015) found that growth stocks outperformed during recessions and periods of economic weakness.
The next three growth stocks are at least 64% below their all-time highs and just begging to be bought at discounted levels.
Sea Limited: down 78% from its record level
The first growth stock to take an absolute hit as the Nasdaq slumped is a Singapore-based conglomerate Sea Limited (SE -5.84%). Sea shares have increased tenfold in just 18 months during the pandemic, but have continued to lose 78% of their value since the October peak.
Sea faces a number of pressing issues as global inflation heats up and COVID-19 continues to wreak havoc on supply chains, particularly in Asian markets. In particular, Wall Street had become accustomed to breathtaking sales growth over the past two years. Going forward, Sea’s revenue growth is expected to slow down a bit, with annual losses expected to continue for a few more years. When sharp market declines occur, valuation comes into focus and companies with large annual losses, such as Sea Limited, often take the chin.
But there’s another side to this story that should excite patient growth investors. Specifically, Sea has three high-growth segments all of which can become serious cash flow generators.
At this time, the company’s gaming division, known as Garena, is the only operating segment to generate positive earnings before interest, taxes, depreciation and amortization (EBITDA). hit mobile game Free fire helped push the number of Quarterly Active Users (QAUs) to 654 million by the end of 2021. More importantly, 11.8% of those QAUs were paying to play Sea’s games. The typical pay-to-play conversion rate in mobile games is under 10 digits.
There’s also enthusiasm for SeaMoney, the company’s digital financial services segment. Although still relatively new, nearly 46 million QAUs were using SeaMoney products and services, such as digital wallets, in the fourth quarter. This is an intriguing segment given that Sea operates in a number of emerging regions where access to basic banking services may be limited.
Finally, there’s the Shopee e-commerce platform, which has consistently been the most downloaded shopping app in Southeast Asia. Shopee has also gained momentum in Brazil. During the fourth quarter, Shopee had $18.2 billion in gross merchandise value (GMV) cross its network. That’s more than the $10 billion in GMV recognized in 2018. If Sea can significantly improve e-commerce EBITDA in 2023, its stock price could rebound significantly.
Green Thumb Industries: down 64% from its all-time high
A second growth stock that has been completely pulverized and just begging to be bought is Multistate Cannabis Operator (MSO) Green Thumb Industries (GTBIF -2.76%). Green Thumb shares are down 64% since hitting their intraday high just over a year ago.
During the first quarter of 2021, marijuana stocks were all the rage. A Democratic-led Congress, coupled with the inauguration of President Joe Biden, raised the hope that federal legalization, or at the very least cannabis banking reform, would become a reality. However, with COVID-19 and geopolitical issues dominating lawmakers’ time, no reforms have passed on Capitol Hill. As a result, pot stocks like Green Thumb have been taken to the stake.
But despite the lack of federal reforms, we’ve still seen three-quarters of all states legalize cannabis to some degree. To add, 18 of those states have green recreational consumption for adults. The fact is, individual state regulation provides more than enough opportunity for well-funded MSOs to thrive.
Green Thumb opened its 77th operating dispensary last month and generated retail sales in 14 states in 2021. Although it has a presence in high-dollar markets like California, the company has wisely chosen to enter a number of limited license markets. These are states that deliberately limit the total number of cannabis dispensary licenses issued, as well as to a single company. It’s a way to promote competition and ensure companies like Green Thumb have a chance to grow their brand(s) and attract followers.
the a factor that really makes the green thumb special is its product mix. Only about a third of the company’s sales come from dried flowers. The rest comes from vaping products, infused drinks, pre-rolls, edibles and other derivatives. The key here is that derivatives have higher prices and better margins. These higher margins have allowed Green Thumb to generate recurring profits while most other MSOs are still losing money.
Considering Green Thumb Industries is expected to continue growing sales by 20% to 25% annually, its price to earnings ratio of 24 for the coming year makes it a good deal.
Etsy: down 70% from its all-time high
A third and final growth stock that has been beaten by the Nasdaq bear market decline is the specialized online retail platform Etsy (ETSY -2.83%). The former pandemic superstar has lost 70% of its value since hitting an all-time intraday high five months ago.
Etsy’s main concerns are historically high inflation and the growing prospect of a recession in the United States. The cost of virtually everything has skyrocketed, threatening to reduce consumer spending. That would be bad news for Etsy, which relies on merchants to increase their ad spend over time.
On the other hand, trying to plan for the inevitable downturns in the US economy is a wild ride. History has shown that most recessions only last a few months or quarters. By comparison, periods of economic expansion are measured in years. Buying fast-growing and innovative e-commerce players during periods of weakness and holding steady for years will likely be a smart move.
Additionally, Etsy brings a competitive advantage at the table which should allow him to stand out. While most online retail platforms target volume, Etsy’s merchants are typically smaller businesses that offer unique/customized products and services that improve consumer engagement. There’s no online retail platform that offers engagement at scale like Etsy.
Etsy’s success in convert occasional buyers into repeat buyers. A repeat shopper is defined as a shopper who makes at least six purchases in a 12-month period, with the total value of those purchases reaching at least $200. Since the start of the pandemic, the number of repeat buyers has increased by 224%! These repeat shoppers are the company’s key to extracting more advertising revenue from merchants on its platform.
Even as the United States enters a recession — US gross domestic product in the first quarter fell 1.4% — Etsy is well positioned to generate sustainable double-digit sales growth. Based on Wall Street’s consensus earnings forecast (which has been fluid for the past few weeks), an Etsy share can be snapped up for just 21 times projected earnings in 2023. That’s as cheap as ever for this company. .