5 Stock Ideas & Lessons to Be Learned
Valuations are getting bear market low in some areas, let's talk about opportunity in the chaos
I’ve never liked the term “pain” when the market turns down.
The biggest stock market and real estate crash’s created opportunity for the flexible and creative investor. In many cases, creating new millionaires to those who were patient enough and strategic enough. Rather than being afraid of any volatility, think of the opportunity that can manifest itself.
In this publication, I’ll provide potential investment ideas that have the ability to produce incredible returns after any sort of market reversal and a few lessons learned over the years that may be helpful in this current market.
All these stock ideas have been beaten down but may be incredibly over sold and trading on some pretty good lines of support. I am not sure where they go in the short run, but these are deals that are hard to pass up.
Lessons Learned During Various Market Cycles
Lessons that can be learned for investor/trader growth are truly only obtained during market down turns, rather than an up trending market. With recent history, many newer investors may believe that a stock growing 40% - 50% YoY and negative operating margins is justifiable at 100x P/S ($NET). This was also the story with many stocks at the beginning of 2021 ($SKLZ, $FUBO, etc). Essentially, what I’m trying to say is that the markets work in cycles and it rotates around but general principles typically remain the same. Having exposure to market cycles typically creates growth, an opportunity to hone in your skills, and develop a winning mindset. You’re going to lose money in the markets at certain points. Obviously, the goal is to win more than you lose over many months/years.
Valuations matter long term. When a stock is trading at 40x P/S, this isn’t normal. Typically stocks trade based on earnings or future earnings potential. When market conditions change, so do valuations. This is why the stock market is so risky. It’s not buying good businesses, it’s what you pay for them.
Investors and traders fall under a spectrum. Isolating yourself toward one category can inhibit returns. History does suggest that a “buy and hold” strategy typically out performs the markets long term. However, at the 2000 NASDAQ market top, it took 12 years to reach new all time highs. In addition to this, some of the best traders I know do focus on earnings, revenue and the growth of the underlying business when using the CANSLIM methodology. Finding your steady medium that works for you can be rewarding.
“The markets can stay irrational longer than you can remain solvent” - John Maynard. The efficient market hypothesis just isn’t true. Liquidity drives stock price in the short term, business fundamentals drive it in the long term. For example, Upstart was nearly $400/share a few weeks ago and now apparently it’s worth $160. What has changed about the business? Absolutely nothing. It became over bought and oversold in both directions.
Control your emotions first, your portfolio second. Your mindset and emotions are everything. You’re not going to make any money if you revenge trade or get emotional about losing/making money. In both euphoric ups and depressing downs, you must stay level. Let the crowd cheer, let the crowd cry. Stay like water and flow in both directions, stay consistent.
Devastating Bear markets happen and can surface when you least expect it. This shouldn’t be in the front of your mind, but always in the back. This essentially means that everything is possible at any given point in time and in the short run, it is unpredictable. Don’t become complacent.
There’s so many more lessons that have been learned over the years, but these are ones I think are most relevant as of today in this investing/trading climate.
In regards to the investing climate, I did mention this was going to happen in the below SubStack publication on November 10th. The thesis for volatility is complimentary but hedging/shorting strategies are for members. Long story short, I think this is likely going to be a gradual process with a capitulatory ending.
For investors/traders who dismiss what the Fed is doing, thinking it wont matter, I advise caution. You must think of it like someone who drinks Coffee every morning for work, it’s a stimulant. If you want to quit drinking coffee, you know it’s going to suck but you don’t know how bad until the withdrawal symptoms start to surface. QE is a stimulant to markets and JPow is taking it away, don’t ignore this importance but accept it. The trading climate and the general market will change with less stimulus and liquidity. Not every 5% dip will be buyable, it will require a different strategy/mindset without “stimulus”.
5 Stocks to Buy
Sometimes during these conditions, profitable stocks will get to levels so far down that by any historical measure it’s over sold. These are stocks I am following right now that are profitable, have a long tailwind for future growth, historically have proven growth, and whose valuations are considered historically “cheap”. I won’t go so much into the business thesis or description, but I will provide a chart and future valuation metrics. I will also provide a thesis, based on data, to provide context around my thought process.
Digital Turbine $APPS
From a technical perspective, this is a traders worst nightmare because it appears to look like it’s heading for a stage 4 decline. However, it bounced off the may lows for a reason. The valuation is downright cheap on a forward basis. Yahoo Finance has them at a 35x forward P/E with a PEG ratio of .71. Analysts also have them growing by at least 30% for the next few years. From a fundamental perspective, the risk reward here is pretty incredible.
Mercado Libre
Sometimes an irrational market just provides you with a blessing. Mercado Libre appears to be one of those blessings.
It’s almost comical how similar Mercado Libre’s chart is to Digital Turbine. MELI is not unfamiliar with volatile price action but this is a whole different type of extreme. Frankly, it’s comical to see a business growing 73% YoY trade down to historical low valuations. Especially given how it’s expanding profitability while being a FinTech and e-commerce leader/giant in LatAm.
Analysts have Mercado Libre growing earnings 100%+ YoY for the next three years, meaning it will expand profitability. Revenue growth is projected, at minimum, to grow 30%+ for the next three years.
Upstart
Upstart is officially down 50%+ from its highs. Does it have further to fall? Maybe, momentum does favor that outcome. However, there was nothing wrong with Upstart’s latest earnings call and it appears to be trading with other stocks that apparently think they need to sell off 30% - 50% on earnings (sorry $DOCU & $ASAN shareholders). Upstart’s forward P/E is currently 73x, conservatively, and they have a NTM EV/S of 14.6x according to analyst expectations.
Their growth was north of 200%+ all year and analysts only have them projected for 30%-ish growth next year. I find this very hard to believe with a world class technology and management team.
D-Local
I had to make a Tweet about this. It’s honestly silly that institutions sold this company after earnings. I believe it was for a lack of guidance and lockup expiration. However, despite the intense selling in many growth names D-Local has remained very strong on its IPO base and appears it wants to hold it. The earnings potential of DLO will likely further strengthen this support line despite market activity.
Obviously, economic factors like a 2008 financial crisis would drop the price further, there’s always risk. But in this particular instance, even with macro head winds, it will be hards to continue to push this lower.
PubMatic
I can’t help but look at PubMatic and think it’s a monster in the making. There’s been many failed breakouts over the past year but this one appears to be sticking, following earnings. Latest quarter, they posted 50%+ YoY revenue growth and even guided for revenue growth of 50%+ on a full year basis. This is showing PubMatic with accelerating revenue growth. What’s more interesting is that they operate with 70%+ gross margins and 30%+ EBITDA margins. This means they’re growing rapidly, while being extremely profitable. They also guided for 20%+ revenue growth next year.
PubMatic valuation is only 7x NTM P/S at a $2B market cap. The forward P/E is currently 56x (probably wrong) by Yahoo Finance standards and the NTM EV/EBITDA (assuming 30% EBITDA) is 21x. This is dirt cheap with a ton of upside left.
Looking Forward
I am heavily paying attention to inflation data that will come out in December. In addition, I will be paying attention to the upcoming FOMC meeting. Just when you think something is going to happen in the markets, the opposite happens and we may be surprised at the outcome in the coming weeks.
You would be surprised how fast the stock market can change on a dime and rally up, even in growth names. These weeks/months are usually what define a portfolio’s returns that year.
Thanks for reading investors/traders, stay tuned and stay classy
Dillon
This is great, nice work. You know, as I've gotten older, I realized the same about efficient market theory. Like, what markets are you talking about? It seemed a reasonable idea when I was staring at economic modeling in undergrad, but what I realize they left out, was the enormous, ever changing set of complexities (namely humans) that markets contend with. There will be gaps and they may last a very long time.