We’re in the teeth of a bear market and there’s no other way to put it. However, that doesn’t mean investors — big and small — should be completely shying away from equities. Even if it’s just a few bucks, say $500, investors should still be looking at constructive stocks. So let’s examine the best stocks to buy for $500.
While the environment is tough — and likely getting worse — investors have to remember that the stock market is forward-looking. Big-money managers are already looking six to nine months ahead of where we are now and trying to adjust their portfolios accordingly.
As a result, the market currently reflect certain, future events and when we actually get to “the trough” of the economy, the stock market will have likely already bottomed.
As bad as the environment seems right now, it will eventually get better. Over the long term, the market tends to heavily favor the bulls, with the S&P 500 producing an annual gain in roughly 80% of years.
So let’s look at the three best stocks to buy for $500.
Best Stocks for $500: Alphabet (GOOGL, GOOG)
I simply can’t ignore Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), and I think the current environment is going to make some patient owners of GOOG stock a lot of money in the future.
First though, let’s look at the tech giant’s biggest problem: When the global economy slips into a recession, advertising companies struggle as marketing budgets get slashed and digital ad spending falls. That said, when the economy starts to turn around, digital ad spending is one of the first areas to recover.
Unfortunately, the recovery hasn’t started yet. For Alphabet, that may mean new lows could be ahead, even though the stock has already suffered a peak-to-trough decline of 45%.
At the end of the day though, Alphabet is one of the world’s best companies. It owns the two most popular websites in the world — Google.com and YouTube.com. GOOG also has a reasonable valuation, delivers strong financial results, and has a solid balance sheet.
For instance, as of the end of the third quarter, the company had $166 billion of cash and short-term investments, while its 12-month trailing free cash flow was $62.5 billion.
I will admit that its business may deteriorate further. Analysts, on average, expect its earnings to decline 15% this year. However, the shares only trade at 18 times analysts’ mean 2022 profit estimate.
Also noteworthy is that the average estimates call for GOOG to deliver positive revenue growth, along with earnings and revenue increases next year.
Best Stocks for $500: PayPal (PYPL)
Another stock worth a look based on its low valuation is PayPal (NASDAQ:PYPL). Unlike Alphabet, this stock has been absolutely crushed. PayPal has suffered a peak-to-trough decline of 78% and has been heavily out of favor.
Despite this tremendous slide, though, the company’s business seems to have stabilized.
While its management has had to cut its guidance a few times in the past, PYPL has actually raised its full-year earnings outlook in conjunction with back-to-back quarterly earnings reports.
PayPal currently trades for less than 17 times its profit, even though analysts, on average, are calling for it to grow its bottom line by 17% next year. The shares are cheap, even if the mean estimate does decline a bit.
PayPal was considered a growth stock in 2020 and 2021, and it’s being treated like one now. That’s fine and to some extent, it’s actually fair.
However, this company continues to grow its top and bottom line, and if there’s a meaningful acceleration in the expectations for its growth, partially driven by an improvement in investors’ sentiment towards the overall market, then this stock is going to fly.
There are many names in tech — from Advanced Micro Devices (NASDAQ:AMD) to Microsoft (NASDAQ:MSFT) — that could be seen as attractive because they have dropped so sharply, making their valuations aenticing. But how about a name that has been climbing recently?
Starbucks (NASDAQ:SBUX) fits the bill.
At one point in May, the shares of this wonderful company had sunk to a low of $68.39. At its recent high, the shares had soared more than 50% from that low point. I don’t know if SBUX will return to that low, although it wouldn’t surprise me if this stock does fall sharply in the coming weeks.
Even if it does, though, its management will continue to tell investors a good story. Interim CEO Howard Schultz recently said, “We’ve got almost 6% price increases and we haven’t seen the loyalty and the transactions abate.”
Those catalysts — loyalty and pricing power — have caused analysts to, on average, call for SBUX to deliver double-digit-percentage revenue growth in each of the next three years. That’s alongside their average estimates calling for 15% earnings growth this year, 18.5% growth next year, 17.6% growth two years from now and 13% growth in three years.
Trading at 28 times this year’s mean earnings estimate, the stock may face additional selling pressure. Any decline in the name would create a buying opportunity, if one can assume that analysts’ mean estimates will prove to be accurate.
On the date of publication, Bret Kenwell held a long position in PYPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.