Are you looking to make some serious money in the next bull market? Look no further! Three experienced Motley Fool contributors teamed up to identify their best stock ideas for the upcoming bounce.
the alphabet (The Google 0.97%) (GOOGL 1.09%)And micron technology (MU -0.59%)And LendingClub (LC 1.27%) These are three pending stocks that have the potential to skyrocket when the current anti-inflationary market mood ends. With a combination of strong fundamentals, industry turmoil, and a touch of calculated risk, these picks may just yield wealth-building returns. Whether or not the market hits 2023, this trio is poised to help your wallet over the long haul.
So let’s buckle up and see what these investment experts have in store.
Digital advertising is alive and well, and just waiting to come out on top
Nicholas Rosolillo (Alphabet): The shrinkage in the digital ad space has been an oft-repeated point over the past year, but I’m going to sound the alarm again. With the world heading into a recession (or maybe it already is), online marketing may be slowing further in 2023. Alphabet – which to this day still collects nearly 80% of its revenue from advertising (Google Search, YouTube , etc..) – may not be a high-growth business in the near term as a result.
Then of course there’s the curveball offered by OpenAI’s ChatGPT tool. I think it’s too early to say that the conversational responses powered by artificial intelligence (AI) that ChatGPT generates will disrupt Internet search. After all, ChatGPT doesn’t search the Internet for information like Google does. Instead, it generates responses based on previous data that has been trained on. In addition, ChatGPT has not been monetized yet. Maybe an OpenAI investor Microsoft You will have some ideas to test.
But in any case, I think Alphabet remains at the forefront of digital advertising for the foreseeable future, which means that an eventual recovery in the global economy will mean a resurgence in the digital advertising business. Along the way, Google Cloud is still riding high (sales were up 38% year-over-year last quarter) and will finally start to generate some profits to feed the Alphabet machine (Google Cloud’s operating loss margin narrowed to 10% last quarter, compared to 13% loss last year).
If that wasn’t convincing enough, there’s also the fact that Alphabet remains profitable overall ($62.5 billion in free cash flow over the past 12 months) and was holding cash and short-term investments net of $102 billion in debt at the end of the year. September 2022. Alphabet is using that cash to buy back massive amounts of stock as it returns excess cash to shareholders. It will pay off when the next bull market hits.
As of this writing, Alphabet is trading at less than 19 times 12-month free cash flow. This tech giant looks like a great long-term value to me right now, and I think it could go higher when the stock market mood finally improves.
The things that memories are made of
Anders Billund (Micron Technology): The computer memory market is highly volatile. The industry tends to experience oversupply situations where manufacturing facilities produce more memory chips than device makers can use, flooding the market with cheaper and cheaper chips. Then, you see excessive production cuts and chip prices soar that even electronics builders demand relief. Changes in final market demand also play a role in this cycle, often exaggerating its effects.
You can set your watch with these cycles, about three years apart. The memory market’s cyclical shifts are easy to see in the revenue chart of computer memory giant Micron Technology.
As you can see, the memory market has recently completed a bullish cycle and is now heading south again. In this case, sector leader Samsung is pumping out huge amounts of cheap chips, causing another price war across the industry.
Micron’s stock is already showing signs of this continuing downturn, which has been accelerated by the unstable macroeconomic climate. The share price is down more than 40% from its all-time highs almost a year ago.
One would think that buying Micron shares in the midst of a cyclical downturn would be a bad idea. Why not wait until prices stabilize, revenue starts growing again, and everything looks fine?
It is because investors know the expected fluctuations in this sector for a long time, which enables them to predict future changes to a certain extent. So, in general, you don’t see Micron stock up After, after All rise in the revenue chart, but a few months Before of the sales curve. In other words, you should expect stock prices to start rising before this price war actually ends:
I will admit that market cyclicality is an imprecise science and perhaps more than an art. However, I’ve watched this movie come out five times in the last 15 years, and the plot tends to be quite the same each time. Based on that experience, it looks like Micron is nearing the tipping point where the stock will rally again for about a year and a half.
Furthermore, Micron stock is attractively priced at 10.5 times excess earnings and 2.2 times sales. This is also consistent with the patterns seen prior to the previous rally.
I can never guarantee that scenario will end this spring, but Micron will almost certainly take the next big leap before the year is out. History suggests that it is better to swing early on these periodic opportunities than to wait too long and miss them completely. So you can take action now.
This lower-priced financial technology is less risky than the market thinks
Billy Dubrestein (LendingClub): Once inflation drops and interest rates return to normal, there’s a good chance that LendingClub stock in fintech stocks will take off again.
Along with the rest of the fintech sector, LendingClub sold aggressively in 2022, down 62% over the year. However, while some of its peers have some very real problems, LendingClub’s business model and profitability should enable it to weather the economic downturn and thrive on the other side. In fact, LendingClub beat revenue and earnings forecasts in every earnings report last year, though its stock continued to decline largely based on macroeconomic concerns.
A game-changer for LendingClub relative to its peers was its acquisition of Radius Bank in early 2021. In the wake of this acquisition, LendingClub transformed from a pure market needing to constantly sell its personal loans to a hybrid banking model, where it is not only able to sell loans, but also to keep it on its balance sheet, backed by low-cost deposits.
With interest rates rising at a rapid rate, loan buyers are retreating from the market, as their demand for returns has risen rapidly. So if you have a fintech platform to underwrite loans and rely on third-party buyers, you’ve been under a lot of pressure over the past year.
LendingClub isn’t immune to this pressure, as loan buyers’ return thresholds have risen faster than LendingClub can adjust its APRs. In the most recent quarter, LendingClub had to reduce its market facility by 15% compared to the prior quarter. On the other hand, LendingClub was also able to more Establishments entered it on their balance sheet by 13%, that is, 33% of their assets.
If you think taking more loans might be a risk, keep in mind that LendingClub has gone to great lengths to target prime borrowers over the past year in anticipation of tougher financial conditions. The average FICO score on a LendingClub portfolio held for investment is 730, with a median borrower’s income of $115,000. Meanwhile, the company appears to have conservatively held losses, holding 6.3% against all loans and holding 7.2% against its core unsecured consumer loan portfolio.
At the same time, LendingClub’s 30-day delinquencies are only around 1% right now, which is well below the 2% to 2.5% range before the pandemic, which itself is well below LendingClub’s reserve ratios. In addition, LendingClub’s balance sheet features conservative capital ratios, with CET1 ratio of 18.3% as of last quarter, nearly 50% higher than most large banks.
When the Fed eventually slows down and/or pauses the rate hike, the delayed increases in LendingClub will catch up with the higher cost of capital, which should reignite the market sales. At the same time, a portfolio held for investment could well outperform a company’s conservative reserve rates, which could trigger a reserve issuance.
The stock sold to just 0.8 times book value and five times this year’s earnings estimate. That’s an assessment that reflects a really bad recession, especially for a company that’s been holding tight and with growth prospects still bright. Once inflation drops or a recession ends, LendingClub could move upward towards its highs in late 2021.