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Growth stocks have been faltering recently. But the question is who’s going to be brave enough to take advantage of the opportunities behind the uncertainty?
Right now, shares in some outstanding businesses are trading at unusually low prices. And when that happens, investors should be thinking about piling in.
Long-term quality
When it comes to investing, I tend to think that the quality of the underlying business is what matters most over the long term. But even the best companies have their ups and downs.
One thing that can cause this to happen is when a firm invests heavily to boost its competitive position. That causes profit margins to contract and the stock starts to look expensive.
A lot of the time, though, this is just the company investing in its own growth. And the results show up in the cash flow statement sooner or later.
In the short term, though, it can cause share price volatility. But this is something investors who think in years or decades – rather than weeks or months – can take advantage of.
Wise
UK-listed Wise (LSE:WISE) is a good example of this. It feels like every time the payment processor reports earnings, its take rate (the amount it charges) is lower than it was before.
Almost every time, the stock market interprets this as a sign of weakness – why would the firm charge less unless it’s facing competitive pressure? In reality, though, it’s the opposite.
Driving down prices widens the gap between the business and its nearest competitor. And it means that anyone looking to send money has an even stronger reason to use the UK company.
The risk is that banks start bringing down their own charges for cross-border transactions. But while that threat can’t be eliminated, bringing down its own take rate does help Wise to limit it.
MercadoLibre
MercadoLibre (NASDAQ:MELI) is in a similar situation. In its most recent update, it reported 45% revenue growth and an 11% decline in earnings per share – the stock fell 14% as a result.
The main reason margins fell is that the e-commerce company made some big investments. It lowered its threshold for next-day delivery and invested heavily in new fulfilment centres.
Those might weigh on short-term profits, but they significantly strengthen the firm’s long-term position. Competitors now have to offer something similar or risk being left behind.
Without MercadoLibre’s scale, that’s extremely hard to do without losing money. And that’s why I think the stock market’s reaction is the wrong one from a long-term perspective.
Be greedy
Most of the time, the stock market knows that Wise and MercadoLibre are outstanding businesses with terrific growth prospects. And it prices them accordingly.
Right now, though, I think investors are focusing on the risks. In Wise’s case, that’s the possibility of geopolitical tensions making it harder to facilitate transactions across borders.
With MercadoLibre, there’s a threat of higher oil prices reigniting hyperinflation in Argentina. The situation is just starting to come under control, so that could be a real setback.
A lot of the time, investors ignore these risks – and that’s a mistake. But it’s also a mistake to focus on them too much, which is what I think is going on right now.
As a result, I think these are two growth stocks that investors should consider buying in March. They’re extremely high-quality businesses trading at unusually low multiples.
