You probably don’t need me to tell you this, but it’s been a miserable year for the stock market. Since each of the three major U.S. stock indexes hit their record highs between mid-November 2021 and the first week of January 2022, the Dow Jones Industrial Average has fallen 22% and the S&P 500 is down 28%. The tech-dependent Nasdaq Composite has taken the brunt of the pain, down 38%.
Although we’ll never know when a bear market will begin, how long it’ll last, or how steep the decline will be, we do know that every bear market, crash, and correction throughout history (save for the current bear market) was eventually erased by a bull market. In other words, buying in advance of the next bull market is a genius move.
With the understanding that timing market bottoms is impossible to do with any consistency over the long run, I’ve been actively adding to existing positions and buying new stocks throughout the bear market downturn. In particular, there are four growth stocks I’ve aggressively bought ahead of the next bull market.
The first growth stock I’ve piled into well ahead of the emergence of the next bull market is fintech-giant PayPal Holdings (PYPL -0.88%). Despite higher inflation clamping down on the discretionary spending of lower-earning workers, PayPal’s digital-payments platform has demonstrated incredible resilience.
What really stood out is that total payment volume (TPV) across all of PayPal’s digital payment channels has continued to grow by a low double-digit percentage, after excluding currency movements. If TPV can sustain a 10% or higher growth rate with U.S. gross domestic product going backwards in each of the first two quarters of 2022, imagine how quickly it’ll be growing when Federal Reserve monetary policy becomes dovish again.
What’s more, the company’s modestly growing base of active accounts is becoming more engaged. When 2020 came to a close, the average active PayPal account completed 40.1 transactions over the trailing 12 months (TTM). As of the end of September 2022, this was up to 50.1 transactions over the TTM. PayPal’s operating model is heavily driven by fees, which bodes well for a future surge in gross profit.
PayPal also hasn’t been shy about pulling levers, when necessary. It acquired Japan’s buy now, pay later service Paidy in 2021. In 2023, it’s aiming to reduce its operating expenses by $1.3 billion. It’s a fast-growing, nimble growth stock that’s simply never been this cheap.
A completely off-the-radar growth stock I’ve bought regularly during the 2022 bear market is dog-focused pet products and services provider Bark (BARK -2.52%). Although Bark’s lack of profitability has some folks skeptical, I see a number of reasons why this small-cap company can make a run at mid-cap status within a few years.
To begin with, the macro picture of pet expenditures tells an important tale. At no point for well over a quarter of a century have year-over-year U.S. pet expenditures declined. In plain English, U.S. pet owners willingly open their wallets more every year to ensure the health and happiness of their furry, scaled, gilled, and feathered “family members.” That’s good news for all pet stocks, including Bark.
What makes Bark so special is its direct-to-consumer focus. Although revenue tends to be a little seasonal, based on brick-and-mortar ordering habits, approximately 90% of the company’s sales derive from the 2.24 million people who have an active subscription with the company. The remainder comes from brick-and-mortar retail locations. A subscription-driven model means highly predictable cash flow and lower overhead expenses.
Even more exciting is what Bark has been doing on the innovation front. During the pandemic, the company introduced three new services: Bark Bright (covering canine dental products), Bark Home (essential items, such as collars and beds), and Bark Eats (dry-food diets for specific dog breeds). Add-on sales have ramped up nicely for Bark and should help the company sustain a gross margin of close to 60%.
A third historically fast-paced stock I’ve aggressively bought well in advance of the next bull market is social media stock Meta Platforms (META 0.49%). Despite the likelihood of slower ad spending in the near term and CEO Mark Zuckerberg’s unwillingness to slow down spending on metaverse initiatives, I’m excited for the future of the company.
The first thing to note about advertising during a bear market is that investors always end up too pessimistic. Even though recessions are an inevitable part of the investment cycle, periods of economic expansion last substantially longer. Buying ad-based businesses with pricing power during downturns is a wise decision.
There are few, if any, ad-driven businesses on the planet with better ad-pricing power than Meta. That’s because its core social media assets — Facebook, WhatsApp, Instagram, and Facebook Messenger — drew 3.71 billion unique monthly visitors during the third quarter. There isn’t another social media provider that advertisers can go to that’ll give them access to the eyeballs of approximately 3.7 billion people.
The other important consideration with Meta is its balance sheet and operating cash flow. Even with Zuckerberg plowing billions of dollars into Reality Labs and metaverse innovation, the company is sitting on $31.9 billion in net cash, cash equivalents, and marketable securities. With its advertising business still incredibly profitable, Meta has a cushion that’s more than enough for it to be aggressive with a potential multitrillion-dollar opportunity.
The fourth growth stock I’ve liberally added before the next bull market takes shape is e-commerce kingpin Amazon (AMZN -1.40%). While a lot of skeptics are focused on the company’s struggling e-commerce marketplace and shrinking bottom line, I believe they’re overlooking the operating segments that matter most.
Yes, Amazon is an online-retail beast. This year, it’ll account for nearly 40% of all U.S. online retail sales, according to an eMarketer report released in March 2022. However, this is a very low-margin segment. Even if retail sales were to struggle for years, Amazon could see its operating cash flow soar if its faster-growing and higher-margin ancillary operating segments continue to thrive.
As an example, the company has pivoted the popularity of its online marketplace into well over 200 million Prime subscriptions. Keep in mind that this figure is from the company in April 2021, so it’s probably considerably higher now, especially with Amazon holding the rights to Thursday Night Football. Subscription services now account for nearly $36 billion in annual run-rate sales.
Cloud infrastructure service-segment Amazon Web Services (AWS) is another key puzzle piece for the company. During the third quarter, AWS accounted for 32% of worldwide cloud spending, based on a report from Canalys. AWS also surpassed $20 billion in quarterly sales for the first time in the third quarter, with this segment consistently generating more than half of Amazon’s operating income.
As long as Amazon’s high-margin operating segments are firing on all cylinders, short-term online marketplace weakness can be largely ignored.