[Editor’s note: “5 Growth Stocks to Buy for 2020” was originally published in January 2020. It is regularly updated to include the most relevant information.]
It may be time to the “buy the dip” in growth stocks. For four big reasons.
First, it increasingly appears that the coronavirus pandemic is “peaking” across the globe, with the number of new daily cases reported plateauing and/or decreasing across many countries, including Spain, Germany, Italy, France, and the U.S. Over the next few weeks, spread of the virus should continue to slow across the globe. Assuming that trend holds up, we could be looking at near-zero transmission by May or June.
Second, also across the globe, economies are starting to re-open. Several European countries have begun re-opening their economies, including Germany. So have a few U.S. states, including Georgia and South Carolina.
Third, there’s tons of fiscal and monetary stimulus in the pipeline. Huge loans programs. Easy borrowing conditions. Delayed taxes. All that stimulus should goose a vigorous economic rebound once the global economy does re-open.
Fourth, interest rates are at record lows, priming growth stocks for a monstrous rebound when the economy improves. That’s because low interest rates tend to help growth stocks, by decreasing the discount rate on future profits (from which growth stocks derive all their value).
Big picture: the coronavirus pandemic is on the decline, the economy is re-opening, economic activity is set to rebound on the back of enormous stimulus, and growth stocks are set to rebound even more on the back of rebounding economic activity and low interest rates.
With that in mind, the best growth stocks to buy for a big growth stock rebound in the back-half of 2020 include:
- The Trade Desk (NASDAQ:TTD)
- Beyond Meat (NASDAQ:BYND)
- Square (NYSE:SQ)
- Canopy Growth (NYSE:CGC)
- Snap (NYSE:SNAP)
The Trade Desk (TTD)
Programmatic advertising leader The Trade Desk has been one of the best-performing growth stocks in recent memory. Over the past three years, TTD stock is up more than 300%, as the company has become a bigger and more important player in the global digital ad landscape.
Long story short, programmatic advertising is the future of digital advertising. As opposed to leveraging humans and guess-and-check processes to run ad campaigns, advertisers around the world are increasingly automating ad transaction processes using data and algorithms. This programmatic advertising pivot will persist for several years, as automation tech gains more traction and digital ad spending trends remain strong.
As it does, The Trade Desk — which is widely considered the world’s best and most robust demand-side programmatic ad platform — will sustain huge revenue and profit growth.
Yes, Covid-19 creates huge headwinds for this company, since ad spending will take a hit so long as consumers aren’t going out and spending.
But once these headwinds pass, consumers will get back to normal, ad spending trends will rebound, and The Trade Desk’s programmatic ad growth narrative will resume with vigor. My modeling suggests this stock will push well above $200 by the end of the year.
Beyond Meat (BYND)
Plant-based meat maker Beyond Meat started off 2020 with a bang. Shares rose more than 50% in the first few weeks of the year, amid some huge food-service deals which underscored that consumer demand for plant-based meat continues to soar.
But, BYND stock has since given up those gains as the novel coronavirus outbreak has kept consumers at home, shut down restaurants, and overall killed discretionary consumer spend.
This won’t last long. By the second half of 2020, it is quite likely that the virus moves into the rear-view mirror, and that consumer behavior normalizes. Consumer behavior normalization means a return to soaring plant-based meat demand, which will lead to more big food-service deals for Beyond Meat, a few strong earnings reports, and a rebounding BYND stock. Expansion into China through a partnership with Starbucks (NASDAQ:SBUX) will also help goose second-half growth.
Low rates, of course, will help supercharge that second-half rebound. As will a high short interest. With rates so low and so much money betting against the stock, there’s a ton of ammunition for shares to rise rapidly in 2H20 on the back of a few favorable developments.
Amid the coronavirus outbreak, consumer spending trends have taken a hit. A bunch of small businesses have also come under tremendous financial pressure. That creates a double headwind for small-business-focused payments processor Square.
But, zooming out, the outbreak won’t last forever, consumers won’t be stuck inside forever, financial support is on its way for small businesses across America, and Square has sufficient liquidity ($2 billion in cash) to weather any and all near-term weakness. So, while Square will be impacted over the next few weeks, the impact won’t be disastrous, and it won’t last forever.
Indeed, once the virus passes and consumers resume their normal shopping habits, Square stock should rebound in a big way for four reasons.
First, Square is a growth stock with a growth valuation that will be boosted by record low interest rates. Second, fiscal and monetary stimulus will help unleash pent-up consumer demand in the second half of the year, leading to an acceleration in Square’s volume and revenue growth rates.
Third, Square’s profit margins will continue to improve because the company’s higher-margin services business will become a bigger revenue contributor. Fourth, the valuation on SQ stock remains attractive.
Put together, those four catalysts give shares ample firepower to stage a huge second-half 2020 rally.
Canopy Growth (CGC)
Pot stocks had a rough go in 2019. Pot stock poster child Canopy Growth was no exception. Shares dropped more than 60% off their early 2019 highs. They are down another 50% in 2020 on concerns that the coronavirus outbreak will kill consumer discretionary spend for the foreseeable future.
But, Covid-19 isn’t here to stay. Once the coronavirus passes — probably by the summer — then consumer discretionary spending trends will normalize, and everything will get better for Canopy Growth.
Falling revenue growth rates will turn into rising revenue growth rates, as demand trends improve thanks to more aggressive retail store openings and new edibles and vapes product launches. Falling gross margins will turn into rising gross margins, as producers cut back on capacity expansion and curb supply growth. Negative operating leverage will turn into positive operating leverage, amid drastic cost-cutting measures across the whole industry.
Thus, in the second half of 2020, Canopy’s revenue growth rates will be bigger than they are today, gross margins will be higher than they are today, and net losses will be narrower than they are today.
Naturally, all of that implies that CGC stock will be higher in the second-half of 2020 than where it sits today.
Digital ad stocks have been killed in early 2020 on concerns that the coronavirus pandemic will curtail consumer spending, leading to a slowdown in digital ad spending. The likes of Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOG) and Pinterest (NYSE:PINS) have all plunged over the past month.
Snap stock plunged, too. But it has quickly rebounded because, as it turns out, this isn’t the end of the world for digital advertising or Snap.
Rather, Snap recently reported first quarter earnings which confirm three important things.
One, Snap’s ad business, pre-Covid-19, was on fire. Revenues were up nearly 60% year-over-year in January and February. That momentum will come back once the pandemic passes, which appears likely in May/June.
Two, Snap is weathering the coronavirus storm with impressive resilience. To-date, April sales are actually up 15% year-over-year. If the worst of the pandemic is indeed over, then Snap’s growth trends will only improve from here.
Three, given improving growth trends, SNAP stock is undervalued. Over the next few months, as pandemic hysteria dies down, the economy normalizes, and ad spending trends rebound, SNAP stock will shoot back to and above $20.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long TTD, CGC, FB, and PINS.