Over multidecade periods, Wall Street has proved unstoppable. But over shorter time lines, the stock market’s most prominent indexes have often been volatile and unpredictable — perhaps none more so than the growth-fueled Nasdaq Composite (^IXIC).
Whereas the ageless Dow Jones Industrial Average and benchmark S&P 500 have galloped to fresh, record-closing highs in 2024, the Nasdaq Composite is the only one of the three major stock indexes that’s not fully recovered from the 2022 bear market. As of the closing bell on Feb. 7, the Nasdaq remained about 2% below its all-time closing high.
For some investors, a roughly 2% decline over a 26-month period will be viewed as a disappointment. But for patient investors with a long-term mindset, any notable decline in a major index represents an opportunity to snag high-quality stocks — in this instance, growth stocks — at a perceived discount.
What follows are four appealing growth stocks you’ll regret not buying in the wake of the Nasdaq bear market dip.
Nio
The first phenomenal growth stock you’ll be kicking yourself for not picking up with the Nasdaq still below its record-closing high is China-based electric vehicle (EV) maker Nio (NIO). Though EV demand has weakened in the U.S. and shows signs of slowing in global markets as competition picks up, Nio has well-defined competitive advantages that can help it succeed.
Nio should benefit as the Chinese economy continues to find its footing following the end of three years of stringent COVID-19 lockdowns and supply chain kinks. Even though this won’t be a straight-line recovery for the world’s No. 2 economy, the country’s burgeoning middle class offers hope that growth rates can continue to outpace most developed markets.
Beyond macroeconomic factors, Nio’s innovation is what stands out. The company has been regularly introducing at least one new EV annually for years. Moreover, it refreshed its lineup with its next-generation NT 2.0 platform, which provides an array of improved, advanced driver-assistance systems. Deliveries of the company’s EVs perked up when models housed on NT 2.0 began hitting showrooms last year.
Out-of-the-box innovation matters, too. Nio introduced its battery-as-a-service (BaaS) subscription during the pandemic as a way to bolster initial sales and keep early buyers loyal to the brand. It recently opened its battery-swap network to the entire EV industry in China.
Another catalyst worth noting is that Nio’s premium sedans and SUVs primarily target middle- and upper-income buyers. People with higher incomes tend to be less sensitive to fluctuations in economic activity and changes in inflation. This should help insulate Nio’s operating cash flow year in and year out.
Lastly, Nio is flush with cash. It takes a lot of capital to build an automaker from the ground up to mass production. Nio closed out September with $6.2 billion in cash, cash equivalents, and various short- and long-term investments, as well as received a $2.2 billion equity investment from CYVN Investments in December.
Lovesac
A second appealing growth stock you’ll regret not purchasing in the wake of the Nasdaq bear market swoon is small-cap furniture stock Lovesac (LOVE). While the furniture industry is typically filled with slow-growing, brick-and-mortar based businesses, Lovesac has shown that its unique approach is a game changer.
What makes Lovesac so special is its furniture. Whereas most traditional furniture retailers rely on the same small group of wholesalers, approximately 90% of Lovesac’s net sales can be traced to its unique “sactionals” — modular couches that can be rearranged a variety of ways to fit most living spaces. Aside from unparalleled functionality, sactionals come with over 200 different cover choices, and the yarn used in their production is made entirely from recycled plastic water bottles. There’s no other product providing this level of functionality, optionality, and eco-friendliness.
Lovesac’s omnichannel sales platform is another critical differentiator. Although it does have physical stores in 40 U.S. states, the company’s success has been a function of its ability to move sales online, as well as rely on pop-up showrooms and a handful of brand-name partnerships. In short, Lovesac’s overhead expenses have been markedly lower than its peers’, which has resulted in superior margins.
Similar to Nio, Lovesac tends to focus its efforts on consumers with higher incomes. Sactionals have a number of high-margin upgrade options (e.g., wireless charging and built-in surround sound), and well-to-do consumers are unlikely to alter their spending habits during modest fluctuations in the U.S. economy.
The feather in Lovesac’s cap is that it’s cheap. Shares can be purchased for about 10 times forward-year earnings, yet Wall Street’s consensus anticipates average annual-earnings growth of 30% over the next five years.
Exelixis
The third amazing growth stock you’ll regret not buying with the Nasdaq not having yet put the 2022 bear market in the rearview mirror is biotech stock Exelixis (EXEL). Despite being heavily reliant on a single drug (Cabometyx, or cabozantinib in its scientific form), Exelixis has the innovation needed to reward its patient shareholders.
As noted, Cabometyx is this company’s superstar. It’s approved to treat first- and second-line renal cell carcinoma, as well as advanced hepatocellular carcinoma. Cancer-drug developers usually have exceptionally strong pricing power with health insurers. Furthermore, demand for cancer drugs doesn’t ebb and flow with the U.S. economy. Helping improve patient quality of life is going to be a steady need in any economic climate, which is good news for Exelixis’ operating cash flow.
One of the more exciting developments is the potential for label-expansion opportunities. In the first half of 2024, Exelixis hopes to carve out a path for a supplemental new drug application for Cabometyx in advanced pancreatic and extra-pancreatic neuroendocrine tumors, as well as for patients with metastatic castration-resistant prostate cancer. The latter is a trial conducted in combination with Roche‘s Tecentriq. Label expansions not only bolster the company’s sales, but they can protect Exelixis’ cash flow from generics for years to come.
We’re also seeing early evidence that the company’s investments in internally developed compounds and collaborations are paying off. For instance, zanzalintinib (previously XL092) is being examined in a half-dozen clinical trials, including an early-stage collaboration to treat advanced clear cell renal cell carcinoma in combination with AB521, which is being developed by Arcus Biosciences.
Even though Exelixis is forging its future through clinical innovation, it hasn’t forgotten about its shareholders. Following the completion of a $550 million share-repurchase program in 2023, the company’s board authorized a new $450 million buyback program for the current year. Buybacks are made easy with Exelixis sitting on a whopping $1.72 billion in cash, cash equivalents, and investments.
Alphabet
A fourth appealing growth stock you’ll regret not buying in the wake of the Nasdaq bear market dip is none other than FAANG stock Alphabet (GOOGL) (GOOG). Although the advertising climate has been challenging over the past two years, Alphabet has sustained moats in place that can grow its operating cash flow at a double-digit annual pace throughout the decade.
There’s no question that recessions and downturns in ad spending are an inevitable aspect of the economic cycle. But what investors often overlook is that recessions are short lived. Only three of the one dozen recessions since the end of World War II have lasted 12 months, with none of these three surpassing 18 months. Comparatively, most periods of expansion endure for years, which is what allows ad-fueled companies like Alphabet to thrive.
The foundation here continues to be internet search engine Google. In January, Google accounted for a 91.5% global share of internet search, which was 88 percentage points higher than its next-closest competitor. This veritable monopoly in search, which Google has had for more than a decade, ensures it’s the go-to for businesses wanting to target consumers. This should give Alphabet exceptional ad-pricing power in most economic environments.
Alphabet’s fast-growing ancillary segments offer plenty of excitement, too. It’s the parent of YouTube, which is the second most-visited social site on the planet. Viewership of YouTube Shorts (short-form videos often lasting less than 60 seconds) soared from 6.5 billion per day in 2021 to more than 50 billion daily by February 2023. This represents another big-time ad-growth opportunity for Alphabet.
Additionally, the company’s cloud-infrastructure service segment, Google Cloud, recently delivered its fourth consecutive quarter of operating income following years of losses. Enterprise cloud spending is still in its relative infancy, and cloud-service margins are notably higher than traditional advertising margins.
Best of all, Alphabet remains historically cheap. Shares can be purchased right now for 13 times estimated cash flow in 2025, which represents a 28% discount to its average price-to-cash flow ratio over the past five years.
— Sean Williams
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Source: The Motley Fool