Markets don’t go up forever. They can also dramatically decline. Investors need to prepare for that. Not only by buying companies that can weather the storm but by being ready to pounce on bargain growth stocks.
The stock market is the best vehicle for creating wealth. No other asset performs as well as stocks. Not gold, not bonds, not real estate. Over the past 100 years, stocks beat them at every turn. History also tells us that for every bear market we encounter, a bull market follows. And they last far longer than the market contractions. Bear markets are measured in months while bull markets can go on for years.
Following the financial and housing market collapse in 2008, there was a sustained 11-year bull market. It was only a global pandemic that interrupted its run. So another bull market is coming. Will it be as long-lasting as the previous one? Who knows? Prepare anyway. The two beaten-down growth stocks below are ones you will regret not buying on the dip.
There’s also one former market darling that you should avoid at all costs, even though it looks cheap. So here are the best bargain growth stocks to consider.
Block (SQ)
Financial services outfit Block (NYSE:SQ) got hammered after reporting second-quarter results. It lost about a quarter of its value in less than two weeks. That presents investors with a great opportunity to buy at a discount.
Gross profit of $1.9 billion was 27% higher than last year. Earnings of $0.39 per share beat Wall Street’s forecast of $0.36 per share. Revenue of $5.53 billion was also well ahead of estimates of $5.1 billion. Gross profit at its core Square and Cash App units rose 18% and 37%, respectively, from last year. So why the collapse?
First, Block is unprofitable. Net losses were $123 million, though that is narrower than the $208 million it lost last year. The Afterpay buy now-pay later (BNPL) business Block acquired last year also isn’t living up to its promise.
Yet Block’s Square ecosystem is one of the primary point-of-sale systems for thousands of small- and medium-sized businesses. The suite of products that come with Square makes it an essential tool for companies. This helps make it one of the best bargain growth stocks.
CashApp is also a premiere mobile payments service. It processed nearly $500 million in volume on an annualized basis. The app has 54 million monthly active users, up 15% year over year.
It shows there is plenty of growth opportunities ahead for Square and Cash App. Block consistently grows users of the services year after year. It is also growing internationally now as well. Gross profits are strong and will eventually get to the bottom line as Block controls costs. When that happens, Block’s stock will ignite an upturn.
Petco Health & Wellness (WOOF)
The aftermath of the pandemic boom hit petcare stocks such as Petco Health & Wellness (NASDAQ:WOOF) hard. Shares of the leading pet care company are down 75% since its IPO two years ago. Even online star Chewy (NASDAQ:CHWY) lost 70% of its value.
Yet there is still tremendous upside potential in the space.
The American Pet Products Association says consumers spent $138.6 billion on their four-footed family members last year. That’s an 11% increase from the $120 billion spent in 2021. The APPA expects sales to grow by an additional 5% to hit $143.6 billion this year.
The largest expenditure was the $58.1 billion consumers spent on pet food. Veterinarian care was another $35.9 billion.
Consumables such as food are Petco’s biggest revenue producer. In 2022 the segment accounted for 47% of Petco’s $6 billion in total sales. Services, including vet care, represented 20% of sales. So two-thirds of Petco’s revenue comes from the two biggest petcare sales segments. All in all, it fits into the category of the best bargain growth stocks.
The reason for this growth is pet owners humanizing their pets. Owners are pet parents and our dogs and cats are fur babies. That’s also driving the premiumization of pet care. Food in particular commands higher prices for the step up in quality. Petco was the first national pet chain to stop using artificial ingredients in its pet food. It partnered with JustFoodForDogs to create its own line of premium food, WholeHearted. Its store brands account for 27% of sales today.
Trading at 14 times next year’s earnings estimates and at a fraction of sales, projected earnings growth, and even book value, Petco is a bargain growth stock to grab now.
And then there is the bargain stock to sell. Sometimes a stock is cheap for a reason, and that explains the next stock.
Upstart Holdings (UPST)
Online lending marketplace Upstart Holdings (NASDAQ:UPST) held so much promise. Using artificial intelligence to vet borrowers, Upstart enables lenders to extend credit to more customers. Even though customers have lower credit scores than traditional lending measures would allow, Upstart’s borrowers don’t add any additional risk. Banks suffer lower loss rates and less fraud.
Despite that, banks are still leery of lending money. Upstart saw second-quarter revenue plummet 40% from the year-ago period to $136 million. Its lending partners originated 64% fewer loans this quarter, just $1.2 billion.
Although this was more than it originated in the first quarter — the first time in over a year that’s happened — Upstart ended up underwriting more loans itself. What it calls “Upstart-powered” loans now account for 12% of the total. That’s up from 10% at the end of last year. It means Upstart is taking on more risk for itself.
Default rates are now rising on those loans. Upstart now believes pandemic-era government stimulus programs were responsible for how well its loan portfolio performed. Now that the programs are ended, it now sees a worrisome rise in default rates, delinquencies, customer bankruptcies, and charge-offs. This helps make it one of the best bargain growth stocks.
Upstart admits it raises questions about the effectiveness of its AI models. Loans purchased by institutional investors in 2021 and 2022 are also underperforming while the fair value of the loans on its balance sheet is declining.
Despite its stock crashing 53% in just one week, Upstart is still way overvalued. It trades at over 49 times next year’s earnings estimates and goes for more than four times revenue.
Upstart’s stock needs to fall further before its valuation is attractive. Even with a bull market coming, this is a former growth stock I wouldn’t be buying and would sell if I owned it.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
