When the stock market is volatile and share prices tumble, opportunities arise to search for great businesses with stocks temporarily trading at bargain levels. When this happens, investors with a multiyear buy-and-hold strategy can shrewdly add such stocks to their portfolio while others sit on the sidelines.
It's true that just because a stock is trading lower doesn't necessarily mean it has become a better buy. Sometimes, stocks trade at depressed valuations for completely valid reasons. In other cases though, the market might be underestimating what a business is worth or leaning into bearish sentiment toward the company despite multiple green flags pointing toward favorable long-term results. The trick is knowing which stock fits in which category.
Of course, any stock you buy should align with your overall investing strategy. Only invest in businesses that you believe in and that you understand both from an operational and financial perspective.
With that in mind, if you're hunting for cheap growth stocks to hit the buy button on this month, here are two to consider.
1. Hims & Hers Health
Hims & Hers Health (NYSE: HIMS) is capitalizing on consumer demand for telehealth services and flexible healthcare solutions. Its subscription-based services allow users to pay a recurring fee to enjoy access to a wide range of licensed medical providers and have prescriptions delivered straight to their door.
The platform partners with physicians in specialties including sexual health, weight management, and mental health, as well as areas like dermatology and hair regrowth. The stock managed an impressive run-up of more than 110% since the start of 2024, although it still trades for less than $20 per share.
Hims & Hers benefits from several tailwinds, including excitement about the addition of GLP-1 drugs to the catalog of prescriptions it offers, stellar revenue growth, and improving profitability. The company became profitable for the first time earlier this year, and its price-to-sales (P/S) ratio hovers around 4 right now, which is reasonable for a high-growth stock.
In the second quarter, Hims & Hers Health reported revenue of around $316 million, up 52% from the year-ago period. It also brought in net income of $13.3 million, and adjusted earnings of $39.3 million. Hims & Hers generates explosive subscriber growth, with its subscriber count up 43% year over year to 1.9 million at the end of the quarter.
It's also worth noting that Hims & Hers Health is free cash flow positive. It generated close to $48 million in free cash flow in the second quarter of 2024.
Hims & Hers went public via a reverse merger with a special purpose acquisition company (SPAC) in January 2021. Many companies that took the SPAC route during that time frame have struggled in the years since. While this stock did struggle, with a steep tumble that left it trading well below its debut price for several years, Hims & Hers has increased its revenue by around 220% over the last three years. And, in that time frame (which followed the lion's share of its plunge) the stock has delivered a total return of about 161%.
Past performance is no guarantee of future results, but the company's financials have been looking better and better each quarter, its various business segments are each expected to deliver more than $100 million in revenue in 2025, and management just elevated its full-year guidance. There's a lot of room left for this company to differentiate itself even in the crowded telehealth space. Plus, the combination of its improving profitability and its still reasonable share price and P/S multiple may entice some investors to take a look.
2. Upstart
Upstart (NASDAQ: UPST) has had a rough time the last few years, largely due to factors outside of its control. The stock trades at around $43 per share and its P/S ratio is 6.8 (which is on the expensive side). Share prices of Upstart have been volatile over the last year, but the stock is still up about 50% from one year ago. And yet the stock trades down by almost 90% from the all-time high of $401 it hit in October 2021.
The investment thesis for Upstart centers on the notion that once macro conditions became less fraught and interest rates started to go down, there could be a significant opportunity for the stock to recover. Going back to 2020, when Upstart became a publicly traded entity, its revenue rose 42% year over year to approximately $233.4 million, and it reported net income of $6 million. Lending volume in 2020 jumped 40% compared to the prior year.
The company operates a platform that leverages artificial intelligence and incorporates a machine learning model that was trained on more than 73 million repayment events to drive better lending decisions. Rather than using traditional FICO credit scores to determine an applicant's creditworthiness and risk level, the platform factors in more than 1,600 variables specific to the applicant to make lending determinations. Once a loan is approved, Upstart partners with over 100 banks and credit unions across the country to hand over the loan and collect a fee for its efforts to deliver various credit products to applicants.
Most loans approved through Upstart's platform get purchased by its partner lenders, but Upstart also funds a relatively small percentage of approved loans in-house. As the Federal Reserve raised interest rates to battle rampant inflation, Upstart's business faced numerous headwinds. For one, the cost of buying loans became more expensive, so institutional investors grew wary about taking them on. Borrowers were more apt to default, and fewer people were applying for loans given how high interest rates were. Upstart's model also calibrates itself to the economic environment, so its loan approval rates fell. That may have been a good way for Upstart to mitigate risk for itself and its lending partners, but it still took a toll on its finances in the short term.
While the Fed's recent 50-basis-point cut to the benchmark federal funds rate was moderate, the central bank expects it will cut interest rates by another half percentage point in 2024, then make four more cuts in 2025 and two in 2026. The rate drops should help Upstart better balance its financials. This should help it become profitable again and regain investors' confidence. There is already some evidence of that as revenue totaled around $128 million in the second quarter, with 91% of loan approvals now fully automated, a new record for the company.
Upstart's new home equity line of credit (HELOC) product is live in 30 states, and the company reports 57% growth in its small-dollar loans product. The company's model is constantly improving in accuracy, with 18% of all accuracy gains happening just in the last year. Currently, over 50% of institutional funding of loans comes from committed capital and other co-investment partnerships.
This business will continue to face volatility as interest rates change and macro conditions shift, but its core business remains steady, and the accuracy of its models is getting better and better. This stock will likely be more suitable for investors who have the stomach for some risk. However, if you're intrigued by the possibilities for a company with a disruptive lending model and a multitrillion-dollar addressable market, Upstart could be a choice worth a long, hard look.
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Rachel Warren has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.
2 Incredibly Cheap Growth Stocks to Buy Right Now was originally published by The Motley Fool