While the blue-chip-heavy Dow Jones Industrial Average is down 11% from its all-time high, the growth-tilted Nasdaq Composite is officially in a bear market, having fallen 27% from its previous high. But investors should remember the markets have been through this before.
Through many periods of high inflation, wars, and business cycles, stocks have returned about 10% per year over decades. A $1,000 investment in the S&P 500 50 years ago would be worth $153,826 today with dividends reinvested. You would be a millionaire if you had added to your investment along the way.
Adding some growth stocks to your nest egg can grow your money a little faster over time. Three Motley Fool contributors recently selected three top stocks that could rebound strongly once the dust clears.
Image source: Getty Images.
Digital advertising is a no-brainer bet
John Ballard (Roku): There are certain trends in the economy that are certain to continue and make for no-brainer investments. E-commerce might be one, but another is streaming entertainment. Streaming services led the growth in home entertainment last year, with subscriptions across the market reaching 1.3 billion globally. That's a 14% increase over 2020.
One problem with the growing demand for streaming is the increase in the number of shows and streaming services. While Netflix and Amazon Prime led the charge in streaming over the last decade, nearly every major network now has a streaming service. That makes the market more competitive for Netflix, but it plays right into the hands of the leading TV hub, Roku (NASDAQ: ROKU).
Roku has become a household name in home entertainment because of its affordability. It partners with TV manufacturers to include its operating system at no charge to the consumer, and those Roku TV models are some of the least expensive TVs on the market. People can also buy one of its player devices that connect to their existing TV. Roku doesn't care how you engage, because it makes money from advertising, commerce transactions, and users signing up for third-party services.
Its dependency on the digital advertising market is why the stock has collapsed 58% this year. Investors are worried about lower consumer spending in the economy and the potential for brands to withhold ad spending. But digital advertising demand will rebound once the economic environment is more favorable. The traditional TV advertising market is worth $60 billion, yet only 18% of ad dollars is spent on streaming services.
There is a great runway ahead of Roku, and the near-term uncertainty with the economy is providing a great opportunity for long-term investors to buy the stock at a deeply discounted price.
Airbnb's stock could be ready for liftoff
Parkev Tatevosian (Airbnb): Fortunately for potential investors, Airbnb (NASDAQ: ABNB) has been caught up in the broad market sell-off in recent months. The stock is down 44% off its high. And when measured by its price-to-free-cash-flow and price-to-sales ratios, the stock is almost cheaper than it's ever been. Meanwhile, the underlying business has excellent prospects.
ABNB Price to Free Cash Flow data by YCharts
In its most recent quarter, which ended on March 31, Airbnb reported revenue of $1.5 billion. That was 70% higher than last year. Folks delayed plans to travel on vacation at the onset of the pandemic. As a result, Airbnb's revenue fell by 30% in 2020. Worldwide, spending on hotels and resorts collapsed from $1.5 trillion in 2019 to $610 billion in 2020. Thankfully, with widespread vaccinations, the trend is reversing.
Overall spending on hotels and resorts recovered to $950 billion in 2021, and Airbnb's revenue soared by 77% at the same time. The company's asset-light business model gives it the flexibility to respond quickly to the increase in demand. Unlike traditional hotel companies, which need to spend significant capital budgets on building new rooms, Airbnb can add capacity by onboarding new hosts.
In that way, when potential hosts observe surging demand, they will be enticed to join the platform and list properties for guests. This business model also gives Airbnb another advantage over hotels: It creates a unique mix of available accommodations. Whatever type of property you are looking to stay at, you are more likely to find it on Airbnb. Airbnb has grown from $2.5 billion in sales in 2017 to $6 billion in sales in 2021. The rebound in travel is likely to carry Airbnb higher still. This is one beaten-down stock you might regret not buying on the dip.
Low price, huge potential
Jennifer Saibil (Starbucks): Starbucks (NASDAQ: SBUX) has been going through many challenges over the past two years. Starting with the pandemic, which threw its coffee shops into a tailspin, it's now encountered changing leadership, store restructuring, store renovations, and union organizing. Even as restaurants opened and sales began to climb, some regions started new lockdowns.
Add inflation, supply chain issues, and global upheavals into the mix, and it's a recipe for a floundering stock price. It's no shock that Starbucks' stock price is down 33% this year. That might look scary to investors. But Starbucks is a great company, and if you can look past the short-term pressure, this could be an excellent opportunity to buy on the dip.
Here are the reasons Starbucks is a top long-term pick: It operates more than 34,000 stores worldwide and still sees plenty of room to grow. On a recent conference call to discuss the company's results from the second quarter of its fiscal year 2022, CEO Howard Schultz said the company is seeing "record demand" in the U.S., and it's been revamping stores and opening new ones to meet that demand. It was agile enough to transition to drive-thrus and takeout when dining rooms were closed, and it's evolving along with that demand, promoting its digital-first technology to harness the opportunity. For example, it launched a new membership program geared toward mobile ordering, and it has several pilot mobile order-only stores. At this point, it would be very difficult for another coffee chain to pose any real competition.
At the current price, Starbucks stock trades at 21 times trailing-12-month earnings, which is cheap for a company that's posting double-digit sales growth. Its dividend yields 2.5%, well above the S&P 500 average of 1.5%, and it's been growing steadily over several years. Starbucks is a no-brainer stock to buy before prices go back up.
10 stocks we like better than Roku
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has positions in Airbnb, Inc. John Ballard has positions in Amazon and Netflix. Parkev Tatevosian has positions in Airbnb, Inc., Netflix, and Starbucks. The Motley Fool has positions in and recommends Airbnb, Inc., Amazon, Netflix, Roku, and Starbucks. The Motley Fool recommends the following options: short July 2022 $85 calls on Starbucks. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
