The curtain has officially closed on what was a stellar year for Wall Street. Since tumbling into a bear market in 2022, the iconic Dow Jones Industrial Average has climbed to new all-time highs, while the growth-fueled Nasdaq Composite (NASDAQINDEX: ^IXIC) has bounced in the neighborhood of 50% off of its lows.
Interestingly, though, the index most responsible for lifting the broader market to new heights in 2021 is still languishing below its record high. As of the closing bell on Dec. 27, the Nasdaq Composite remained 6% shy of its high-water mark.
While this decline might be disappointing to short-term traders, it’s music to the ears of long-term-minded investors. That’s because notable dips in the Nasdaq Composite of any form have historically represented an opportunity to buy high-quality growth stocks at a discount.
What follows are four unsurpassed growth stocks you’ll regret not buying in the wake of the Nasdaq bear market dip.
Amazon
The first unrivaled growth stock you’ll be kicking yourself for not adding with the Nasdaq Composite still recovering from the 2022 bear market is none other than e-commerce leader Amazon (NASDAQ: AMZN). Although there’s some concern that Amazon could struggle if the U.S. economy weakens in 2024, the segments that matter most for this juggernaut are still firing on all cylinders.
Most consumers are familiar with Amazon because of its world-leading online marketplace. In 2022, Insider Intelligence (formerly known as eMarketer) estimated that Amazon brought in nearly 40% of all online retail sales in the United States. However, online retail sales yield razor-thin margins. While its online marketplace is a big-time revenue producer, Amazon’s operating cash flow and income are predominantly derived from its ancillary segments.
None of these divisions is more important than Amazon Web Services (AWS). According to estimates from tech-analysis company Canalys, AWS accounted for 31% of global cloud infrastructure service share in the September-ended quarter. Enterprise spending on cloud infrastructure is still very early in its ramp, which suggests sustained double-digit growth is likely throughout the decade (if not beyond). AWS is consistently responsible for 50% to 100% of Amazon’s operating income despite the fact that it only accounts for about a sixth of the company’s net sales.
Amazon’s subscription services and advertising services segments are important cash flow drivers, too. Amazon has signed up more than 200 million people globally to a Prime subscription. Further, its online marketplace is attracting more than 2 billion people to its site each month. That’s a recipe for strong ad-pricing power with merchants.
Though Amazon isn’t inexpensive from a traditional price-to-earnings (P/E) ratio standpoint, it’s historically cheap relative to its future cash flow. Since the company reinvests most of its cash flow back into its business, this price-to-cash-flow metric is far more telling of how cheap Amazon stock is right now.
Lovesac
A second unsurpassed growth stock you’ll regret not buying in the wake of the Nasdaq bear market decline is small-cap furniture stock Lovesac (NASDAQ: LOVE). While recessionary fears have the potential to weigh down the traditionally stodgy furniture industry, Lovesac’s out-of-the-box innovations show it’s not like its brick-and-mortar peers.
The differentiation between Lovesac and every other furniture company is readily apparent in its products. “Sactionals” — modular couches that can be rearranged to fit most living spaces — account for just shy of 90% of Lovesac’s net sales. Sactionals have more than 200 different cover choices, and the yarn used in their production is derived entirely from recycled plastic water bottles. It’s worth noting that sactionals have an abundance of upgrade options available, too, including built-in surround sound and wireless charging stations.
As you may have guessed, this differentiation does make sactionals costlier than a traditional sofa or sectional couch. But this priciness is actually a competitive advantage for the company. It’s specifically targeting middle- and upper-income consumers who are less likely to alter their buying habits during economic downturns.
Lovesac’s omnichannel sales platform is another key to its success. During the COVID-19 pandemic, Lovesac was able to pivot its sales online easily. While it does have a physical presence in 40 U.S. states, it hedges its brick-and-mortar sales with popup showrooms, brand-name partnerships, and direct-to-consumer sales. This strategy lowers its overhead expenses and lifts its operating margin.
Considering its low double-digit annual sales growth, Lovesac looks like quite the bargain at 12 times forward-year earnings.
Walt Disney
The third top-notch growth stock you’ll regret not scooping up in the wake of the Nasdaq bear market drop is media company Walt Disney (NYSE: DIS). Though the COVID-19 pandemic clobbered multiple facets of Disney’s operations, such as its theme parks and film division, numerous catalysts are now set to act as tailwinds.
To build on the obvious, Walt Disney should see a steady rebound in its film entertainment division and theme park operations as life returns to normal and attendance picks up. These bread-and-butter segments, which are fueled by Disney’s exceptionally valuable brand and strong pricing power, can sustain double-digit earnings growth over the next five years.
Even more important, Walt Disney’s storytelling and engagement simply can’t be duplicated by other companies. Though there are other theme parks to attend and movies to watch, they don’t have the characters, depth of story, or emotional attachment factor that Walt Disney’s theme parks and movies have brought to the table for decades. Consumers will willingly pay a premium for the Disney experience.
Another catalyst for Walt Disney is the expected improvement in the company’s streaming operations. Increasing monthly subscription prices on its various service tiers will bring in additional revenue that, along with mindful cost-cutting, should shift this segment to profitability toward the end of fiscal 2024.
A forward P/E ratio of 17 for an industry leader that’s expected to deliver annualized earnings growth of 15.4% over the next five years is a screaming bargain.
Starbucks
The fourth unsurpassed growth stock you’ll regret not buying in the wake of the Nasdaq bear market dip is ultra-popular coffee chain Starbucks (NASDAQ: SBUX). Although inflation and COVID-19 were both big-time nemeses for Starbucks in 2022, there is now a laundry list of catalysts acting as a tailwind.
Similar to Walt Disney, Starbucks is enjoying favorable year-over-year operating performance comparisons as it moves beyond the worst of the pandemic. This is especially true in China, where Starbucks operates more than 6,800 stores as of Oct. 1, 2023. China abandoned its stringent “zero-COVID” mitigation strategy in December 2022, which means we’re still witnessing a healthy ramp in sales as life returns to normal.
Something very clearly working in Starbucks’ favor is the loyalty of its customer base. Speaking as someone who’s only missed his daily trip to Starbucks on a handful of occasions over the past 30 years, the company’s customers tend to be willing to absorb price hikes above and beyond the rate of inflation. Starbucks closed out fiscal 2023 (ended Oct. 1) with 32.6 million active Rewards Members. These Rewards Members average bigger tickets than non-Rewards customers, and they’re more likely to use mobile ordering, which expedites servicing times.
Furthermore, Starbucks made big changes to its drive-thru ordering system during the pandemic that are now paying dividends. It added video to its ordering boards to personalize the drive-thru experience, as well as focused on food and drink pairings to drive high-margin items and expedite the ordering process.
While Starbucks’ stock might not appear cheap at 20 times forward-year earnings, it certainly is once you factor in its phenomenal pricing power, loyal customer base, and expected annualized earnings growth of 15.5% over the next five years.
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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. Sean Williams has positions in Amazon and Lovesac. The Motley Fool has positions in and recommends Amazon, Starbucks, and Walt Disney. The Motley Fool recommends Lovesac. The Motley Fool has a disclosure policy.
4 Unsurpassed Growth Stocks You’ll Regret Not Buying in the Wake of the Nasdaq Bear Market Dip was originally published by The Motley Fool