There’s always a bull market somewhere – and I think I’ve found where the next one will emerge.
All year long, the bull market has been centered around energy stocks. Lots of really smart investors think the bull market in energy stocks will persist into 2023, too.
But here’s the problem with that thesis: Energy stocks were the best-performing stocks in 2021 and 2022. So, banking on them being big winners in 2023 as well would require that they’ll “three-peat” as the best performing asset class.
Energy stocks seldomly do that. When they do perform well, they tend to be “two-and-out.” They enjoy two good years in a row, then give up leadership to another sector.
It’s most likely that in 2023, then, a new sector takes the lead. So… what sector will soar in 2023?
Here’s a thought: e-commerce stocks.
The Fundamental Thesis
E-commerce stocks have been on a roller coaster ride over the past few years, and it appears the next leg of this roller coaster is a ride significantly higher.
E-commerce stocks soared in 2020 and most of 2021 as the COVID-19 pandemic raged across the globe. It kept consumers inside and forced the bulk of shopping to happen online.
Then, over the past 12 months, those same e-commerce stocks have come crashing down. Pandemic-era restrictions have eased, and consumers have pushed back against the “digital everything” narrative, making an extra effort to go to the store instead of shopping online.
Now, though, things have normalized.
We, as consumers, exhausted all that pent-up demand from pandemic lockdowns. We’ve gone back to the mall a few times. And while it was fun, we’ve come to realize why we ditched it in the first place: long lines, crowded stores, busy parking lots, long commutes, and now sky-high gas prices to get to and from the store.
So, we’ve returned to our pre-pandemic ways and are shifting more of our shopping to the online channel. This shift is happening right now, and it’s causing widespread growth re-acceleration across numerous e-retailers.
Amazon (AMZN) recently reported that its e-commerce business saw revenue growth rates re-accelerate in the third quarter of 2022 for the first time since late 2020. Over at Shopify (SHOP), revenue growth rates reaccelerated this quarter for the first time since early 2021. Etsy’s (ETSY) revenue growth rates, meanwhile, have re-accelerated for two quarters in a row now – also for the first time since late 2020.
The e-commerce industry is making a comeback, and we think the comeback has legs.
The Technical Outlook Is Bullish
The technicals on e-commerce stocks corroborate the fundamental thesis. E-commerce stocks have likely bottomed and are ready to re-accelerate.
Specifically, the Amplify Online Retail ETF (IBUY) has been around for over five years. In that time, the ETF has established two significant multi-year bottoms. The first happened in December 2018, and the second in March 2020. Both bottoms happened at levels within a few percentage points of each other.
About a month ago, the Online Retail ETF collapsed to those levels after a multi-quarter crash. It bottomed around there and has been showing signs of life ever since.
In other words, e-commerce stocks have come “full circle” from a technical perspective. They’re back to levels at which these stocks have historically tended to bottom following crashes. More than that, it looks like e-commerce stocks want to bottom around these levels once again.
Therefore, we consider the technical outlook on e-commerce stocks quite bullish here.
E-Commerce Stocks Are Too Cheap
The revenue growth re-acceleration we’re seeing at e-commerce firms today is bullish. So is the technical setup. But frankly, both are anecdotal pieces of evidence in our bull thesis on e-commerce stocks.
That thesis hinges mostly on valuation.
That is, e-commerce stocks are too cheap for their own good. E-commerce is still a secular growth industry that will continue to grow at a healthy pace over the next several years. Yet e-commerce stocks today are trading at pretty much all-time-low valuation levels.
For example, Amazon stock is trading at 1.9X trailing sales – more than 40% below its 10-year-average trailing sales multiple and one of its lowest sales multiples of the past decade.
Meanwhile, Etsy stock is trading nearly 40% below its all-time average sales multiple. Chewy (CHWY) stock is about 50% below its all-time average sales multiple, and Wayfair (W) stock is more than 80% below that multiple. All three stocks are trading either at or near all-time-low sales multiples today.
They’re trading like e-commerce is going out of fashion. But, if anything, the revenue growth reacceleration we’re seeing across the industry today is telling us that e-commerce is coming back in fashion.
That means these stocks are ready to run higher in 2023.
The Final Word on E-Commerce Stocks
Now is a fantastic time to be buying stocks.
They’re down from their highs and trading at depressed-enough valuation levels to warrant significant upside potential. Simultaneously, enough signals have emerged from the market to say that it feels like this bear market is coming to a close.
Therefore, you have a bunch of assets with huge upside potential over the next 12 months and very limited downside risk over the next two to three months.
That’s a great risk-reward setup. So, I repeat: Today is a great day to be a buyer of stocks. We think 2023 could be a record-setting year for the stock market.
In that breakout year, we think e-commerce stocks will be big winners. But they won’t be alone.
Find out the best stocks to buy for next year’s big breakout rally.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
