Vehicle maker Rivian is one of the companies with battered share prices that is worth a look.
Courtesy Rivian
The 2022 bear market has popped a few bubbles. But it’s also created bargain stocks that could deliver stellar performance in the future.
Bubbles, after all, have popped in the past. Don’t forget, Amazon.com (ticker: AMZN) was once down 95% from its December 1999 high. Back then shares went from $5.65 to less than 28 cents a share. But since the 2002 low, Amazon stock is up about 36,000% and has earned investors about 34% a year on average for more than a generation.
The S&P 500 has earned investors about 9% a year on average over the same span.
Finding an Amazon, of course, is the trick.
To narrow the field, Barron’s screened for new stocks, trying to disrupt old industries, that are down more than 80% from their 52-week highs. We found a dozen.
The list includes: online car seller Carvana (CVNA), artificial intelligence lending platform Upstart (UPST), connected exercise company Peloton Interactive (PTON), zero-commission brokerage Robinhood Markets (HOOD), buy-now-pay-later platform Affirm (AFRM), crypto exchange Coinbase Global (COIN), EV start-up Rivian Automotive (RIVN), online betting platform DraftKings (DKNG), biological cell programmer Ginkgo Bioworks (DNA), International Business Machines ( IBM
) spinout with no traditional vowels in its name Kyndryl (KD), metaverse software play Unity Software (U) and e-signature company DocuSign (DOCU).
The 12 are down an average of 86% from their 52-week highs. Collectively, the declines have wiped out more than $600 billion in market value.
Picking a long-term winner isn’t easy. Judging by Wall Street ratings, Ginkgo, Rivian, Coinbase and Unity software are worth a look. Those are the four with strong analyst support. The average Buy-rating ratio for the four is about 67%, well above the 58% average for stocks in the S&P500.
Ratings would lead investors away from Carvana , Upstart , Robinhood, Kyndryl and DocuSign . Those stocks have Buy-rating ratios less than 40%.
Analyst ratings aren’t everything. Earnings matter too. Upstart and DocuSign are expected to generate positive earnings in 2023. Upstart trades for 12 times estimated 2023 earnings. DocuSign trades for about 37 times estimated 2023 earnings.
Checking out balance sheets of badly beaten-up stocks is a good idea too. Coinbase, Rivian and Ginkgo have the most cash relative to the size of their market capitalization. That means they have some cushion on their way to generating profits. Coinbase is actually generating free cash flow.
Six stocks in our dozen—Coinbase, Rivian, Ginkgo, Unity Software , Upstart, and DocuSign—have at least one favorable characteristic and are worth a second look for bargain-hungry investors. Only time will tell which ones will flower and which ones will wilt.
Don’t forget a screen is only the start of any fundamental investment process. It’s a way to narrow down the universe of potential stocks so research efforts can be allocated to ideas that are attractive to a certain set of investors.
Finally, don’t forget that stocks falling by more than 80% isn’t necessarily a buy signal. There are far more companies that go bankrupt than become the next Amazon. Still, bear markets always create some opportunity. Even if it’s hard to see it at the time.
Write to Al Root at allen.root@dowjones.com
Source: finance.yahoo.com