3 Growth Stocks Off 25% with Massive Upside Potential

2020 was crazy, right? Last March, when faced with the greatest economic decline since the Great Depression and a stock market that had its fastest 30% sell-off ever, the federal government forcefully stepped in and provided support to prevent the economy from crashing.

While the verdict is still out for the economic recovery, the stock market was certainly saved. Last year the S&P 500 climbed 16% higher for full-year returns but nearly doubled from the lows established in March. In fact, large cap growth stocks like Apple, Amazon, and Tesla gained 82%, 76%, and 695%, respectively last year alone! 

It wasn’t just Wall Street that saw account balances swell. Instead, an unlikely group that benefited the most might be young retail investors who live by the phrase “you only live once,” or YOLO. The so-called “dumb money” stepped in to snap up shares of growth stocks and cryptocurrency on the cheap with a few becoming millionaires in the process. 

The economy appears to be slowly healing as more needles find their way into arms and the pandemic’s end seems in sight. So naturally, you’d expect these growth stocks to continue rocketing higher… and you’d be mostly wrong. In fact, this is the first year since 2016 that growth stocks are underperforming compared to value stocks. 

2020’s stock market titans are 2021’s laggards 

This year has seen an amazing reversal with high-growth stocks being sold off in a rout. For an example of just how swift the change in fortunes has been, look no further than two of 2020’s biggest winning growth investors: Cathie Wood and Chamath Palihapitiya. 

Wood’s ARK actively managed ETFs exploded last year, catapulting her to first-tier investment manager status despite only founding the company six years prior. Palihapitiya led the SPAC revolution with his Social Capital Hedosophia blank check companies and became known as “the SPAC king,” a legend among Reddit investors and Twitter. 

This year has been more difficult for both. Cathie Wood’s ETFs are down in 2021 with the flagship ARKK ETF down 18% year to date. That said, she’s significantly outperforming Palihapitiya’s SPACs Virgin Galactic (-32%), Clover Health (-51%), and Opendoor (-37%) SPAC reverse mergers.

The situation looks significantly worse when you use drops from recent highs–Virgin Galactic is down more than 70% since February!

While they’re noteworthy, they’re certainly not alone. Growth stocks are getting pummeled this year with many down 50% or more from highs established in February. 

Why investors should be happy about growth’s sell-off

At Millennial Money, a common question we hear is “what’s going on with the market?”We often find our answers shock people. Instead of being nervous or concerned about the recent growth-stock sell-off, we’re elated to buy stocks on sale!

That’s because we know two things: first, we share legendary investor Robert Arnott’s viewpoint that “in investing, what is comfortable is rarely profitable,” as well as understanding that to generate above-average returns, you must control your emotions better than the average investor. Second, we know that we’re going to be net buyers of stocks over the next 10 years and we like to pay less for growth. 

That’s why we feel that for long-term investors, many growth stocks have been unfairly sold off and present opportunities to buy at a discount. 

We had our team of investors pick out three high-quality stocks that have seen recent sell-offs. Each stock is riding trends that could last a decade or more and is a leader in their industry. 

If you’re looking to find opportunities that could look like fantastic buys at today’s prices five years from now, you’ll want to add these stocks to your watchlist today! 

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Upstart is one of the market’s most compelling growth stories 

Upstart Holdings, Inc. (NASDAQ:UPST)
Price: $123.03 (as of close Jun 14, 2021)
1-Year Price Target: $131.17
Implied Upside: 56.1%

Eric Bleeker (UPST): On March 5th, Millennial Money featured Upstart as our Stock of the Week. Less than two weeks later, the company released its fourth quarter earnings and there was a bombshell inside. 

Upstart, which grew revenue 42% in 2020, issued guidance that revenue growth would accelerate to 114% in 2021 and reach an expected $500 million. That kind of business acceleration from a disruptive company is what growth investors dream of, so it wasn’t surprising that Upstart stock jumped from $60.79 the day before it announced earnings to a high of $165.66 three days later. 

What was more shocking was that Upstart’s stock rapidly retreated in the weeks that followed. 

Fast forward to this week and the company just issued its first quarter earnings and once again increased guidance for 2021. The company now expects revenue to grow 157% this year. 

In pre-market trading the day after announcing its latest earnings, Upstart was up 27%. However, with a sell-off happening across growth stocks, Upstart saw its 27% pre-market gains whittle down to 2.6% by the end of the day. 

I don’t know how to be more clear that seeing a stock accelerate from 42% sales growth one year to 157% the next is rare. That kind of inflection point almost never happens. Yet, Upstart is trading at a lower price today than it was three months ago. 

To me, this is the quintessential example of buying great companies when there’s “blood on the streets.” Wild price increases in Reddit stocks and special acquisition companies (SPACs) spoke to a market that was in a speculative frenzy and was due for a breather. 

Yet, Upstart is the exact kind of stock worthy of a high multiple. It’s a fast-growing company in a massive space (lending), has a disruptive business model (building effective AI models), and its results speak to a clear first-mover advantage in its space. 

Like most growth stocks, Upstart isn’t without its risks. Yet, with the company moving from personal loans (a $92 billion industry) to auto loans ($626 billion) and potentially into mortgage and credit card originations ($3.4 trillion) in the near future, it also has some of the highest potential upside in the entire market. 

I plan to purchase more shares of Upstart (I already own the stock) the moment our disclosure policy allows. This is a stock that’s being unfairly punished by the growth stock sell-off that I am happy to hold for the next five years and beyond. 

Okta: This fast-growing security platform is down 25% from recent highs

Okta (NASDAQ:OKTA)
Price: $224.36 (as of close Jun 14, 2021)
1-Year Price Target: $279.67
Implied Upside: 26%

Chris Neiger (OKTA): Okta isn’t exactly a household name, but the company has made a name for itself in the identity and access management (IAM) market. Okta’s security platform acts as a gatekeeper for online users, granting access for some and denying it for others. 

Just a few years ago the company had a total addressable market (TAM) of $55 billion in IAM, but the company’s recent expansion into identity governance administration and privileged access management increased Okta’s TAM to a massive $80 billion. 

Not only is Okta expanding its addressable market, it’s also strengthening its core products with new acquisitions. The company just closed on its purchase of Auth0, an identity platform for developers, which should help Okta continue to offer first-rate identity access management services to people creating apps and websites.

Okta experienced significant growth in 2020 as many companies shifted their employees to remote work. The result helped Okta reach 10,000 customers at the end of the year. 

Some investors think that Okta’s growth story is over because the U.S. economy is opening back up and have pushed Okta’s share price down more than 20% over the past three months.

But I think those investors are missing the bigger picture. Okta just expanded its addressable market and was growing before the pandemic arrived. Even when things are back to relative normal, companies will look to Okta’s IAM services to protect their data because it’s one of the best in the business. 

For long-term investors who understand that security is a key component of any company’s website, Okta looks like a great bet. And with its stock currently trading at a discount now is a great time to start a position in this IAM leader.

The Trade Desk is down 47% from highs despite beating earnings

The Trade Desk (NASDAQ:TTD)
Price: $585.76 (as of close Jun 14, 2021)
1-Year Price Target: $684
Implied Upside: 38.6%

Jamal Carnette (TTD): Shares of buy-side advertising technology company The Trade Desk cratered on earnings. Currently, the share price is cut nearly in half from highs established earlier this year, and that’s an opportunity for long-term investors. 

The Trade Desk’s long-term thesis remains intact: a shift from buying digital advertising spots automatically instead of person-to-person negotiation between advertisers and publishers. This is called programmatic advertising and results in greater efficiency and transparency for the advertisers The Trade Desk represents.  

Despite advertising budgets cratering last year, The Trade Desk shares shot up nearly 210% as growth stocks were on fire. Unfortunately, shares got pricey on a price-to-sales basis as full-year revenue only increased 26% during that period (although I should mention EPS increased by 220%). 

The Trade Desk’s first quarter earnings saw the stock sell-off 25%. So naturally you’d expect the company to miss revenue or earnings estimates or provide poor guidance… and you’d be wrong: The Trade Desk saw revenue growth accelerate to 37% year-over-year and beat the top and bottom-line results handily. 

Better yet, the company guided for second-quarter revenue higher than Wall Street’s analysts. It appears the company is back to form and the recent sell-off has given long-term investors a chance to buy a fast-growing stock on discount. And in a nod to the high dollar price per single share, the company announced a recent 10-for-1 stock split that will allow smaller investors to buy full shares.   

Like all stocks, The Trade Desk has risks. Last year shares rallied on hopes for its Unified ID 2.0 marketing solution that had many publishers and marketers rallying around as platforms like Alphabet’s Android and Apple’s iOS were quickly removing third party cookies. Recent updates from both companies appear to make it harder for Unified ID 2.0’s email-based identifier to capture data.  

That said, those fears appear to be overblown and don’t apply to the high-growth advertising verticals like connected TV that led The Trade Desk’s growth last quarter. 

In the end, The Trade Desk will continue growing revenue by adding value to advertisers. The company inked an innovative deal with Walmart last quarter to provide advertisers insight into the retail giant’s shoppers that will make it easier to locate prospective buyers.  

After a near 50% sell-off, the opportunity The Trade Desk offers is simply too cheap to ignore. 

Why are growth stocks out of favor?

To understand why growth stocks are now out of favor, it’s important to note why they were in favor last year. Morningstar found the divergence between growth and value was at its highest level ever last year. There are a lot of theories for this, all of which have a certain level of truth. 

  • The pandemic pushed many bored young investors into stocks, and online forums allowed them to essentially pool large amounts of capital into meme stocks, often synonymous with growth stocks. 
  • Investors plowed into next-gen technologies that were positively impacted by the pandemic—aka the stay-at-home trade—while many value stocks were negatively impacted by government-imposed shutdowns. 
  • Lower interest rates and loose money from the Federal Reserve created an environment where profitability concerns were cast aside in exchange for stocks with strong growth potential. 

This year we’ve seen a reverse of many of these conditions. Although monetary policy from the Fed remains loose, the return of inflation has boosted energy and industrial stocks and the prospect of interest rate increases has driven banking stocks higher while hurting high-growth tech names. 

Last year’s strong return from growth created an environment where growth stocks were priced at extreme levels versus value stocks.

On the fiscal front, many growth stocks with significant unrealized gains have sold off since reports that the Biden Administration was considering raising max capital gains rates to as high as 43.8% to potentially pay for infrastructure, which will disproportionately boost value stocks.

Keep a long-term focus

It’s often said the stock market is the only business in which when things go on sale people run out of the store. While humorous, the quip is well-founded in truth. 

Last year investors piled onto growth stocks regardless of the valuations, while this year they’re staying clear despite nothing fundamentally different about these companies and their operations. If anything, an improving economy should help these companies reach their growth expectations. 

In the long run, investors are going to reward companies that are growing by disrupting their respective industries. At Millennial Money, we recommend using sell-offs to find innovative growth stocks on sale. 

Jamal Carnette, CFA owns shares of The Trade Desk. The Motley Fool owns shares of and recommends Okta, The Trade Desk, and Upstart Holdings, Inc. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

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