A bull market will eventually replace this bear market. It always does.
We saw some potential signs of a change over the last month as the stock market surged multiple times on reports that the Federal Reserve was likely to cool off its interest rate hikes beginning this month. While it’s a fool’s errand to try to time the market, it’s still a good idea to prepare for the next upswing by owning stocks that are well-positioned to benefit from a shift in market sentiment and a macroeconomic tailwind.
Below are three top stocks that look ready to soar in the next bull market, and I’d feel comfortable owning any of them in an extended bear market as well. Let’s find out a bit more about these three no-brainer stocks.
1. Airbnb: the first name in home-sharing
Only a handful of brands in the world are synonymous with the industries they operate in. Airbnb (ABNB -0.14%) is one of them.
The pioneer in home-sharing dominates its industry today, and it is reaping the benefits of that leadership. In the third quarter, its revenue jumped by 29% to $2.9 billion, and net income soared by 46% to $1.2 billion, giving it a net profit margin of 42% in its seasonally strongest quarter.
Even as the travel recovery is expected to slow down, Airbnb still has a large addressable market to penetrate, and the company continues to evolve. It recently streamlined its interface to make pricing clearer, and it is partnering with landlords to give renters the opportunity to list on Airbnb, which will bring new supply online.
As a business, Airbnb’s model is sublime. It’s a user-generated business where the company gets to sit back and collects commissions while hosts do the work of preparing their homes and welcoming guests. The company’s capital expenditures are almost nonexistent, showing that the model is highly scalable and efficient.
From an investor perspective, this also looks like a great time to buy Airbnb. Shares are trading at a price-to-earnings ratio of 40, about double the average valuation of the S&P 500. However, Airbnb’s growth potential looks to be significantly greater than double the potential of the average S&P stock. Investors would be wise to take advantage of the current discount.
2. Shopify: the growth story isn’t over
E-commerce stocks took a beating this year, and Shopify (SHOP -0.67%) wasn’t spared.
Shopify’s tech platform for online sellers still generates more than $200 billion in annual gross merchandise volume, but its stock is trading down roughly 77% from its 2021 peak. That sell-off, though, was mostly a result of two issues: the stretched valuations in the software sector a year ago, and the difficult comparisons the company is facing after its booming growth during the social-distancing phases of the pandemic.
Still, there’s a good argument that the stock is oversold at the current price. Shopify showed signs of life in its Black Friday update, saying its merchants sold $7.5 billion worth of goods on its platform over the long holiday weekend, a 19% increase from the previous year, and 21% on a constant-currency basis.
That bodes well for its overall performance in the fourth quarter, and it shows Shopify is drawing market share away from Amazon, which guided for fourth-quarter revenue growth in the 2% to 8% range. Amazon’s efforts to lure sellers away from Shopify with its “Buy with Prime” program seem to have fallen flat.
Despite the stock’s collapse this year, Shopify is still the default e-commerce platform for smaller businesses — wannabes like BigCommerce and WooCommerce lag far behind. Even Amazon shuttered its competing product, Webstore, several years ago, deciding that competing head-to-head with Shopify was futile. If you want to start an online retail business, you’re likely to do it with Shopify.
Shopify’s stock may be having a rough time, but its business model is solid. Its revenue growth should accelerate as its year-over-year comparisons get easier and the macro environment improves, positioning it to reward investors over the long term.
3. Williams-Sonoma: An undervalued retail stock
If you’re looking for a classic value stock opportunity, it would be hard to find a better one these days than Williams-Sonoma (WSM 1.72%). The high-end home furnishings retailer trades at a price-to-earnings ratio of just 7, a valuation generally reserved for declining businesses and other distressed stocks. Wiliams-Sonoma is anything but. In fact, 65% of its sales now come from its e-commerce channel, showing how the company has adapted its business.
The retailer, which also owns the Pottery Barn and West Elm chains, is a top performer in its industry, posting an operating margin of 15.5% in its most recent quarter. Further, its comparable sales were up 8% at a time when its peers in the home furnishings niche are seeing sluggish growth. Even better, over the last three years, its comparable sales jumped nearly 50%.
That shows that the company made significant gains in market share and profitability over the last three years.
What seemed to spook investors was that management stepped back from its 2024 guidance, which called for $10 billion in revenue, though it said profitability would rise in the second half of 2023 and into 2024 as its inventory normalizes and supply chain headwinds fade. Management also expressed confidence in the long-term growth of the business, though the macroeconomic environment is volatile.
Even if Williams-Sonoma doesn’t hit that $10 billion revenue goal in 2024, the stock still looks like a steal at the current price. As a bonus, the company has been aggressively buying back stock, reducing shares outstanding by 11%, and it pays a dividend that yields 2.8% at the current share price.
Based on those numbers, as well as its valuation, growth, and profitability, there are plenty of reasons to like Williams-Sonoma stock today.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Airbnb, Amazon.com, and Shopify. The Motley Fool has positions in and recommends Airbnb, Amazon.com, Shopify, and Williams-Sonoma. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.