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Growth stocks have been volatile recently. But the question is who will have the courage to take advantage of the opportunities that cause uncertainty?
Currently, shares of some prominent businesses are trading at unusually low prices. And when that happens, investors should think about stacking.
Long-term quality
When it comes to investing, I tend to think that the quality of the underlying business is the most important thing in the long run. But even the best companies have their ups and downs.
One thing that can cause this to happen is when a company invests heavily to increase its competitive position. That causes profit margins to contract and the stock starts to look expensive.
Most of the time, however, this is a company that invests in its own growth. And the results will appear on the cash flow statement sooner or later.
In the short term, however, it can cause volatility in stock prices. But this is something investors who think in years or decades – rather than weeks or months – can take advantage of.
Smart
Listed Smart (LSE:WISE) is a good example of this. It seems like every time a payment processor reports earnings, their take rate (the amount they charge) is lower than before.
Almost always, the stock market interprets this as a sign of weakness – why would a company charge less unless it is facing competitive pressure? However, in reality, it is the opposite.
Lowering prices widens the gap between the business and the nearest competitor. And it means that anyone looking to send money has a strong reason to use a UK company.
The risk is that banks start to reduce their costs for cross-border transactions. But while that threat can’t be eliminated, reducing your intake helps Wise limit it.
MercadoLibre
MercadoLibre (NASDAQ:MELI) is in a similar position. In its most recent update, it reported a 45% increase in revenue and an 11% drop in earnings per share – the stock fell 14% as a result.
The main reason for falling limits is that e-commerce companies have made huge investments. It lowered its next-day delivery limit and invested heavily in new fulfillment centers.
Those may weigh on short-term profits, but they greatly strengthen the company’s long-term position. Competitors now have to offer something similar or risk being left behind.
Without MercadoLibre’s scale, that is very difficult to do without losing money. And that’s why I think the stock market reaction is wrong from a long-term perspective.
Be selfish
For the most part, the stock market knows that Wise and MercadoLibre are outstanding businesses with incredible growth prospects. And he calls them accordingly.
Right now, though, I think investors are focused on the risks. In Wise’s case, that may be because of national tensions that make it difficult to operate across borders.
With MercadoLibre, there is the threat of high oil prices reigniting hyperinflation in Argentina. The situation is starting to take control, so that could be a real reversal.
Most of the time, investors ignore these risks – and that’s a mistake. But it’s also a mistake to focus too much on them, which I think is happening right now.
As a result, I think these are two growth stocks investors should consider buying in March. The highest quality businesses trade at unusually low prices.
