A market sell-off never feels good, but the smartest investors know it presents an opportunity too. After you get over your initial feelings of worry, your next move should be to start looking for bargains.
If the market continues to decline in the coming weeks and months, Costco Wholesale (NASDAQ: COST), MercadoLibre (NASDAQ: MELI), and Shopify (NYSE: SHOP) are three stocks to keep a close eye on. They may look expensive right now, but if they fall, be ready to pounce.
1. The warehouse model king
If you're one of the 134 million cardmembers who shops at Costco Wholesale, you've likely been sold on the warehouse giant's low prices and service. More and more shoppers continue to jump on the Costco bandwagon, leading to higher sales and profits, despite inflation.
Membership increased 7.8% year over year in the fiscal 2024 third quarter (ended May 12), and fee income was up 7.6%. Sales rose 9.1% in the quarter, driven by a 6.6% increase in comparable sales (comps). Earnings per share (EPS) were up 29% to $3.78 as well.
The retailer's strong momentum has extended into the current quarter. Costco provides monthly updates for certain metrics, and sales increased 7.1% year over year in July with a 5.2% increase in comps. E-commerce has been growing rapidly for the company, and sales from this channel were up 20% last month.
While Costco has seen some pressure from customers holding off on buying larger, more expensive items, shoppers are still flocking to its warehouse clubs to get the most out of their memberships. That why traffic was up 6.1% in the quarter, while the average ticket was roughly flat.
The company enjoyed positive media coverage when it announced a special dividend of $15 per share. And more recently, it raised its membership fee from $60 to $65. Management had been putting off that price hike while shoppers were grappling with inflation, but the company thinks it can provide greater value to members by driving the proceeds from the increase into improving the business.
The one factor usually holding investors back is Costco's valuation. Its shares trade at a premium valuation of 53 times trailing 12-month earnings. If Costco gets dragged down by a broad market sell-off, the stock will be undeniably appealing.
2. Powering e-commerce in Latin America
MercadoLibre is a global e-commerce leader, but its focus on Latin American means you may have never even heard of it. It serves 18 countries with an online business similar to Amazon's, and it also offers popular fintech services to complement its e-commerce business.
Although it just celebrated 25 years in operation, MercadoLibre is still growing like a much smaller and younger business. It benefits from operating in a huge market that's still underpenetrated in e-commerce. And after years spent building out a large fulfillment network, the company can get products to shoppers quickly and at low cost.
Gross merchandise volume (GMV) has increased at a staggering compound annual growth rate of 28% since 2016, and it grew 20% year over year, or 83% on a currency-neutral basis, in the second quarter. Engagement is increasing with more active shoppers, more shoppers buying across different categories, and higher shopper frequency.
The fintech business is growing even faster with total payment volume (TPV) up 36% (86% currency neutral) last quarter. MercadoLibre keeps rolling out new services as it adds customers and sales. That creates more opportunities for cross-buying and engagement. One of its newest ventures is opening up a digital bank in Mexico, where it already has a significant digital payments presence, and it plans to become the top digital bank in the country.
MercadoLibre is in high-growth mode and looks like a strong buy even at the current price. The stock has held relatively steady through the recent volatility, but any pullback will be an opportunity investors shouldn't miss.
3. Driving the e-commerce revolution
Shopify is the name behind many online shops, providing the infrastructure for its merchant customers to tap into the long-term growth of e-commerce. However, it's expanded from providing full-service e-commerce shops to offering solutions and packages for companies of any size, and it's making inroads with large enterprise clients. As e-commerce only increases its share of total retail sales, Shopify is poised to keep up its impressive momentum.
But the company has spent the last couple years recovering from mistakes made during the pandemic. Like many other businesses that aggressively expanded to meet soaring demand in the early months of the global crisis, it had to scale back and focus on profitability once its pandemic-era growth proved unsustainable.
Shopify's latest earnings report hints at its continued progress. It just reported phenomenal second-quarter results that beat expectations across the board. Revenue increased 21% year over year, and GMV increased 22%.
The profitability metrics were also outstanding. Gross margin expanded year over year from 49.3% to 51.1%, free cash flow increased from $97 million to $333 million, and operating income was $271 million following a $1.6 billion loss in the year-ago quarter (stemming from the sale of the logistics business).
The stock trades at a premium valuation of nearly 12 times trailing-12-month sales and 52 times forward earnings. While Shopify is already a great growth stock, it'll be a no-brainer buy if shares are dragged down by a broad market decline.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has positions in MercadoLibre. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, MercadoLibre, and Shopify. The Motley Fool has a disclosure policy.
3 No-Brainer Stocks to Buy if the Market Sell-Off Continues was originally published by The Motley Fool