• Brett Schafer

Five Stocks I’m Looking at During this Bear Market

The last two weeks have been downright absurd. People are (and probably rightfully) panicking and reacting in extreme ways to this pandemic. It has everyone worried because we don’t know what the next few weeks will hold. Nobody likes uncertainty.

The market has priced in a lot of this fear/economic slowdown, and rather quickly. In fact, this is the fastest we’ve gotten to a bear market in recorded history:

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That’s one scary chart. It also does not tell us where stock prices will be in the next few months. Could they fall another 20%? Sure. Could this also be the worst of it? That’s possible too. All I know for sure is that I have a long-term time horizon and that a lot of companies I like are trading at 20-30% discounts.

What I also know is, in bear markets people tend to act frantically and erratically. I feel, and am sure others to do, a sense of urgency to buy stocks while they are trading at lower levels. You don’t want to miss out, but you definitely don’t want to blow your whole wad if stocks tank even further.

So, these are in no way “MUST BUY NOW” recommendations, but, here are five stocks to look at during the bear market.

1. Spotify

Note: I already own some shares of Spotify.

I think temporary isolation has the potential to accelerate Spotify’s user growth. People are going to have a lot of free time which can be filled with music and podcasts, and Spotify is the easiest source for that. And since nobody will be commuting, traditional radio will take a huge hit, potentially boosting downloads for audio streaming apps.

Even if we don’t get an isolation-boost, Spotify shares are still off around 12% from recent highs, meaning you can buy the same portion of the company for less than you could a month ago. I know that seems dumb to explain but people have trouble understanding it.

Right now, Spotify trades at an enterprise value of $22.5 billion, an EV/sales of 2.97, and an EV/FCF of 46. Net income has been negative, as they are in a big podcast investment period, but they have demonstrated the ability to generate profits if need be. Current gross margins are low (they pay most of their revenue out to record labels), but should improve with podcast and advertising investments.

Last quarter, users and sales grew 30% and 25%, respectively. If they are able to get long-term net margins of 10%, a P/S of around 3 means they would be trading at an earnings multiple of about 30. I believe that is a bargain for a company poised to deliver 20%+ sales growth for the foreseeable future.

*listen to our podcast debate on Spotify here.

2. Telaria

Note: I do not own shares of Telaria.

Telaria is a small-cap company, with a market cap of $300 million. They have a software platform where publishers can manage their video advertising across internet-connected services. The stock had been soaring over the past year after it was announced they were merging with Rubicon Project, another digital advertising platform. Together, they will be the largest independent sell-side platform.

Trading at over $12 a month ago, Telaria shares are now down to $6.50. That is an almost 50% haircut, giving them a P/S of 4.4. Yes, fourth-quarter revenue was flat and full-year only grew 23%, but connected-TV (CTV) revenue grew 100% and is projected to be the majority of sales in Q1 2020.

Right now Telaria has a -10% net margin and a flat/declining traditional digital ads business. However, CTV is so strong I could care less about their traditional business units. Plus, the combined Telaria-Rubicon entity will have more diverse revenue streams, seeing as Rubicon is doing well in a bunch of non-CTV ad units.

With a fairly low sales multiple and huge industry tailwind, I think there is potential for a lot of upside in Telaria stock over the next few years.

Check out our podcast on Telaria here.

3. Stitch Fix

Note: I do not own shares of Stitch Fix.

Stitch Fix is a subscription styling service that sends clothes to a user’s home (if you want a more detailed description, check-out their investor presentation from this month). With 3.5 million active clients, the company is fairly popular but mainly with wealthier women. However, they do have a men’s’ and kid’s line as well.

With people trying to limit how much they go to brick-and-mortar retail, I think there will be an “isolation-bump” in the number of new users signing-up for Stitch Fix. No one is going to the mall if they don’t have too.

Wall Street hated Stitch Fix’s earnings, sending the stock down over 30% to an all-time low. I did not think the report warranted that big of a drawdown. They kept up 22% sales growth, 17% user growth, and grew sales per active client 8%, all while net income was around break-even.

Right now Stitch Fix is trading at an EV/sales under 0.7 with 44.8% gross margins and 22% sales growth. If they stopped spending on ads and new hires, their net margin could be around 10%, or an earnings multiple of 7. And this disconnect will only increase once they lock-in another year of double-digit sales growth.

The more I look at it, this might be the number-one stock on my watchlist right now. Wow, was I impressed and inspired to take a deeper look at Stitch Fix.

Check-out our podcast covering Stitch Fix here.

4. The Trade Desk

note: I do not own any shares of the Trade Desk.

I used to own shares of the Trade Desk, but ended up selling a little while ago because of valuation concerns. Now, with the stock back around $200, I am taking another look.

The Trade Desk is in the same industry as Telaria, but on the opposite side of the equation. They are a demand-side platform, meaning they enable clients to purchase digital advertising campaigns. And so far, it has worked out really well for the company.

In 2019, revenue growth was 39% with a net margin of 16.4%. Breaking down specific segments, CTV grew 137% (notice a trend?), audio grew 185%, and mobile video grew 50%. Guidance calls for 30% sales growth in 2019.

As of the last trading session, the Trade Desk had a P/E of 82 and an EV/sales of 13.4. That seems high, but they have gross margins of 78%, meaning that at scale they could easily be printing a 30-35% net margin number.

With huge audio/CTV tailwinds plus the transition to programmatic ad sales, I like the Trade Desk a lot, even at this relatively steep valuation.

5. Bed Bath and Beyond

note: I do own shares of Bed Bath and Beyond.

I just wrote about this stock, so I’ll keep this one brief. Bed Bath and Beyond has a market cap of $900 million. It also has $1.1 billion in working capital, a new CEO, a dividend yield of 4.8%, and a lot of debt that isn’t due for a few years.

They trade at a single-digit operating cash flow multiple, and would be trading at a P/E of 4 if they got back to 2(!)% net margins. There’s nothing more to the pitch.

But Remember…

Things could always get worse from here. Your portfolio could take another 20% hit. If you are not prepared for that possibility, you probably aren’t fit to manage your own money. Risk-premium is impossible without risk, so be prepared for anything, and act rationally by patiently adding to companies you believe in. That’s all you can control.

Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.


#Stocks #Telaria #BedBathandBeyond #Investing #BearMarket #Spotify #Finance #theTradeDesk #StitchFix

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