No one knows for sure when the next bull market will start, but we do know one thing: There will be another bull market eventually.
Over more than a century, the S&P 500 has overcome world wars, depressions, terrorist attacks, and pandemics to deliver an average annual return of 9% with dividends reinvested. While there have been several bear markets during that time, none of them have knocked the U.S. stock market off its growth trajectory. In fact, since the average length of a bear market is only about nine months, the current one, which began in early January when the S&P 500 peaked, has already lasted about as long as a typical bear market.
That’s no guarantee that the market is about to bottom, however. In fact, Federal Reserve Chair Jerome Powell just warned of future interest rate hikes, a warning which is likely to pressure stock prices. But inflation will eventually cool and the economy will normalize.
When it does, here are three stocks that look primed to win in the next bull market.
1. Amazon: Riding an e-commerce recovery
Amazon (AMZN -1.57%) has been one of the best-performing stocks of the last generation, but lately, the company’s returns have been less impressive. Year to date, the stock is down 30%, and it’s off nearly 40% from its peak last year.
Amazon shares have fallen on concerns about valuation as well as a slowdown in revenue growth and losses in its e-commerce division.
Indeed, revenue rose just 7% in the second quarter to $121.2 million, but the good news for investors is that top-line growth is expected to accelerate in the quarters ahead. Management called for 13% to 17% revenue growth in the third quarter, and comparisons will get easier from here, since e-commerce growth began to slump in the second half of last year as the economy reopened.
Finally, Amazon’s cloud computing division, Amazon Web Services (AWS), continues to put up strong growth, and seems to be the source of most of the company’s value at this point. In the second quarter, AWS delivered 33% revenue growth to $19.7 billion, with an operating margin of 29%.
When inflation cools and the next bull market begins, Amazon’s e-commerce division will likely be growing faster than it is today. AWS will be even bigger, and investors will be willing to assign a higher multiple to growth stocks like Amazon. It looks like a good bet to be a winner.
2. PayPal: Leading the war on cash
Like Amazon, PayPal (PYPL -2.96%) was a big winner during the pandemic as consumer spending shifted online in channels like e-commerce.
More recently, however, the company’s growth has slowed as it faces difficult comparisons, so the stock has taken a hit. Shares are down 54% year to date and off more than 70% from their peak last year; investors fear the effects of a recession, and worry that PayPal’s sluggish growth rate could be the new normal.
Second-quarter results were disappointing as well, as revenue grew just 9% to $6.8 billion. However, CEO Dan Schulman said he expected the second quarter to mark the nadir of the company’s performance.
For the third quarter, PayPal is on track to hit its guidance of 10% revenue growth, or 12% excluding eBay (following the end of a long-term agreement between the companies). PayPal is also launching a cost-cutting plan to drive bottom-line growth, saving $900 million this year and $1.3 billion next year, in part by trimming its real estate footprint and shifting hiring to lower-cost regions.
As a payments stock, PayPal is also cyclical; its business and its stock price should bounce back in the next bull market, just as they will for most cyclical stocks. PayPal is now valued like an average stock, with a price-to-earnings (P/E) ratio of just 22 based on this year’s expected earnings per share, which is only slightly more expensive than the S&P 500.
However, PayPal still has ample growth opportunities, and its earnings multiple should expand once investor confidence in the market returns.
3. Carvana: The disruptive online car dealer
Few stocks have been as volatile as Carvana (CVNA -5.89%), the fast-growing online used-car dealer. The stock jumped more than 1,000% during the pandemic before shedding more than 90% of those gains. The market seemed to bet that slowing growth, sky-high used-car prices, and a business model that had yet to show a profit would push the company into bankruptcy.
Car-buying is a cyclical business, and Carvana is certainly sensitive to the macroeconomic climate, but it could also benefit from rising interest rates in some ways.
Out-of-control inflation in the used-car market has lifted prices to record highs, and a normalization in that market would make it easier for Carvana to accurately price the cars it buys and sells. Additionally, while rising interest rates are expected to cool off demand for used cars, they also create an opportunity for Carvana to make more money through its financing products.
To reassure investors that it can get through the bear market, the company laid off 12% of its staff in May, which will help bring down overhead costs and reach its long-term target of selling, general, and administrative expenses making up 6% to 8% of total revenue. Carvana stock will likely struggle as long as the bear market persists, as it faces a number of risks if a recession happens, but those seem to be priced in as the stock trades at a price-to-sales ratio of just 0.17.
If the company can make it through the next few quarters, the upside potential in the next bull market could be huge, as Carvana has the leading brand in the fast-growing online used-car market. It will have to reaccelerate revenue growth and keep an eye on costs, but if it does, another multibagging surge wouldn’t be a surprise.