It typically doesn't take much fortitude to achieve impressive returns in roaring bull market. What usually distinguishes history's greatest investors is their approach to unexpected volatility and bearish conditions. Seizing on market crashes as an opportunity to buy great stocks at a discount will have an immense positive impact on your performance over the long term.
To help readers find stocks that can deliver huge wins, we put together a panel of Motley Fool contributors and asked each member to identify a potential world-beater. Read on to see why they think Huya (HUYA 4.87%), Nasdaq (NDAQ 1.69%), and Okta (OKTA 1.78%) can crush the market.
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This tech stock already looks cheap
Keith Noonan (Huya): Much of the concern about a substantial market crash hitting in the near future centers around the market's uncertain appetite for growth-dependent tech stocks. While some valuations in the tech sector may have become unreasonably stretched, Huya is a promising stock that's already cheap, and a crash-driven sell-off would present opportunities to build a position at even more attractive levels.
Huya is a China-based company that operates a platform for users to stream video game footage, commentary, and other content. Viewers pay money to their favorite broadcasters on the platform, and then Huya takes a cut. The company is also pursuing growth for ad-based business and investing in esports teams and events in order to drive engagement. After its soon-to-be completed merger with competitor DouYu International Holdings, the company's position in the online content space will be even stronger.
Even prior to the upcoming boost from merging with DouYu, Huya is posting strong user growth -- with average monthly active users (MAUs) on the company's platform rising roughly 18% to hit 146.1 million in the third quarter. Huya looks cheaply valued at roughly $6.3 billion and trading at 26 times this year's expected earnings and three times expected sales.
Adjusted earnings surged 75% year over year in the third quarter and the market continues to underestimate the business and its impressive profit growth. The company has a price-to-earnings growth (PEG) ratio of just 0.7 and a forward PEG ratio of just 0.1, reflecting that gains for the company's share price have lagged behind the business's impressive earnings growth. For context, a PEG ratio below one is often a sign that a company's stock is undervalued.
Huya stock is already on sale compared to most high-growth tech stocks. If the next market crash drags shares lower, investors should seize the opportunity to get an even better deal.
The exchange titan
Joe Tenebruso (Nasdaq): The weak die. The robust survive. And the antifragile thrive. This is the way of things during economic crashes.
Heavily indebted companies in precarious competitive positions perish. High-quality businesses with strong competitive advantages weather the downturn. Meanwhile, a select few businesses actually gain from the disorder -- and emerge stronger from the chaos.
As the owner and operator of the Nasdaq Stock Exchange, Nasdaq benefits from market volatility. When prices plunge and fear grips investors, trading volumes tend to rise. Nasdaq earns a fee from each trade that's conducted on its platform. Thus, when trading volumes surge, so do its profits.
The Nasdaq facilitates trading in some of the most popular stocks, such as Apple, Amazon, and Tesla. Trading in these stocks can soar during market crashes, as traders rush to protect their profits and fund managers sell their most liquid positions to raise cash. Evidence of this can be seen in Nasdaq's trading volumes during the depths of the coronavirus-related crash. When stock prices plunged in March 2020, trading volumes more than doubled to 65.6 billion shares from 32.6 billion in February.
For these reasons, buying and holding Nasdaq stock can provide ballast to your diversified investment portfolio during market declines. It can also provide you with a steady source of growth, as Nasdaq's stock price tends to track the relentless growth of the Nasdaq Composite -- an index of the stocks that are listed on the Nasdaq Stock Exchange -- over time.
Okta is not just a pandemic stock
Jamal Carnette (Okta): Shares of Okta have been battered along with the greater technology industry due to a combination of rising interest rates and a rotation away from "pandemic stocks" that provided critical services needed to work from home. However, if you look deeper into the story it seems the bearish thesis is overblown.
Okta is preparing to release its fourth-quarter results next week and all expectations are the company will report $822.5 million in revenue during fiscal 2021, a 40% increase over the prior year and a deceleration from the prior year's 47% growth. While admittedly this is from a higher baseline, a cursory look at Okta's revenue growth makes it clear that Okta is not just a pandemic stock.
Metric | Fiscal Year 2016 | Fiscal Year 2017 | Fiscal Year 2018 | Fiscal Year 2019 | Fiscal Year 2020 | Fiscal Year 2021 (Expected) |
|---|---|---|---|---|---|---|
Revenue (millions) | $85.9 | $160.8 | $256.5 | $399.3 | $586.1 | $822.5 |
Growth | 110% | 87% | 60% | 56% | 47% | 40% |
Data source: Okta annual reports.
Businesses were investing in digital transformation and migrating to cloud computing before the pandemic and will continue to do so after it. Look for businesses to continue using Okta's services and for the company to continue growing its dollar-based net retention rate by providing additional services, most notably from its rapidly growing customer identity and access management (CIAM) products, which have grown by approximately 70% per year in recent quarters.
It's true that interest rates are rising at a rapid pace. However, they're not at a point where they can be considered competition versus stocks. Long-term investors would be well suited to take advantage of Wall Street's myopic focus on rising interest rates to pick up shares of Okta on sale.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jamal Carnette, CFA owns shares of Amazon. Joe Tenebruso has the following options: long January 2023 $2400 calls on Amazon. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, Okta, and Tesla. The Motley Fool recommends HUYA Inc. and Nasdaq and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.
