Day: November 17, 2024

Companies capable of hypergrowth often see their stock prices bid up to outrageous levels. Often, however, shares remain a bargain compared to their long-term potential. Those willing to stomach the high upfront premium can be heavily rewarded if they remain patient.

Even after rising more than 100% since I first pointed out how cheap the shares were, my favorite hypergrowth stock still looks like a bargain compared to its long term potential. Let’s take a closer look.

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Since the year began, I’ve been writing frequently about Nu Holdings (NYSE: NU). Warren Buffett purchased shares for this holding company when the company went public in 2021, and I noticed he had lost hundreds of millions of dollars on this investment over the years that followed. At the time of Nu’s initial public offering (IPO), shares traded at roughly $10. One year after the IPO, they were valued at less than $5.

Buffett isn’t often wrong about companies, so I decided to take a closer look. What I found amazed me. Not only was Nu one of the fastest-growing companies I’d looked at in years, but its potential growth trajectory was truly impressive.

Let’s back up a bit to review what exactly Nu does. Many readers have never heard of the company before today, and for good reason — Nu operates exclusively in Brazil, Mexico, and Colombia. So unless you live in one of those countries, or just happened to have come across Nu in your stock investment research, it’s likely you know very little about this amazing business.

At its core, Nu is a fintech company. That means it operates in the financial sector, known for its massive addressable markets — but also that it, in actuality, operates more like a technology company, capable of growth rates most financial businesses would be enviable of.

When the company was founded in 2016, its primary goal was to disrupt Latin America’s old-school banking industry. At the time, the financial sector was dominated by a handful of incumbent banks operating out of physical branches. Nu turned the industry upside down by offering its services directly through a smartphone. This approach allowed it to scale rapidly, pushing new financial services to customers at the touch of a button while reducing overhead costs, with part of those savings passed along to its customers.

Nu’s growth has been impressive. Over the past decade, it has gone from essentially zero customers to more than 100 million. More than half of all Brazilian adults are now Nu customers. The company’s growth runway in Mexico and Colombia is much longer than in Brazil, Nu’s first and oldest market. And with more than 650 million residents living across more than a dozen other Latin American countries, Nu’s long-term growth is likely just getting started.

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Excitement around Nu’s explosive growth caused the market to value shares at a steep premium during the IPO. But a marketwide decline in 2022 caused this premium valuation to collapse. After setting an all-time low of just $3.31, shares have been on a massive run, recently topping the $15 mark. Think it’s too late to get involved? Keep reading.

As Nu’s volatile stock price has proven, it’s very difficult to bet on a stock’s short-term price movements, even if it’s a high-quality fast grower like Nu. Whether or not Nu’s stock price beats the market again in 2025, this company remains my best bet for growth investors looking for maximum long-term upside potential.

In the past, Nu was primarily valued based on its sales growth. This approach made a lot of sense given the company remained unprofitable, yet was consistently posting annual sales growth above 100%. Recently, however, the company turned profitable. This tipping point is just getting started, especially with a company like Nu that should experience heavy economies of scale with its tech-first business model.

Over the next five years, analysts expect annual earnings-per-share (EPS) growth to exceed 50% per year. So the current valuation of 50 times earnings — which otherwise would appear quite expensive — should come down rapidly as EPS continues to grow. Its forward price-to-earnings multiple, for instance, is just 37.

Like all growth stories, this will take some time to play out. But don’t be fooled by Nu’s soaring stock price — there’s still time for you to get involved if you’re committed to staying patient.

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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.

My Favorite Hypergrowth Stock to Buy With $1,000 Right Now was originally published by The Motley Fool

There’s nothing wrong with Coca-Cola (NYSE: KO) as a company. In fact, it has a storied past and likely a bright future. But Wall Street is well aware of how attractive an investment Coca-Cola is, leaving it as what appears to be a fully priced stock today (and most of the time).

It does only one thing: make beverages (although it does this very well). So if you are looking at Coca-Cola, you might want to consider direct competitor PepsiCo (NASDAQ: PEP) or shift gears and look at Procter & Gamble (NYSE: PG). Here’s why.

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Coke’s biggest strength is that it is a dominant beverage maker. It benefits from the distribution prowess, marketing skill, and innovation capabilities that come along with its size.

But this strength is also a weakness, since Coca-Cola’s business is anything but diversified. Sure, you could argue that it makes different kinds of beverages, but beverages are the name of the game just the same.

At the end of the day, beverages are just one tiny niche of the broader consumer staples sector. Which is why you might want to take a look at PepsiCo, one of Coca-Cola’s primary competitors in the beverage niche.

PepsiCo adds a dominant position in salty snacks (Frito-Lay) and a substantial packaged food business (Quaker Oats). This diversification can help to smooth financial performance over time. That may limit gains to some degree, but if there’s a problem in the beverage business, it won’t derail PepsiCo as it might Coca-Cola.

Meanwhile, Coke’s price-to-earnings ratio (P/E) is roughly equal to its five-year average. PepsiCo’s P/E is a bit more than 5% below its five-year average at this writing. And its 3.3% dividend yield is a touch higher than Coca-Cola’s 3.1%. So PepsiCo looks a little cheaper, offers a little more yield, and has a much more diversified business. That should be attractive to more conservative investors.

There’s another direction that investors can go, and that’s to focus on the broader consumer staples sector. If you do that, then dominant companies like Procter & Gamble can be brought into consideration.

P&G makes consumable goods that people use every day and buy regularly. It has leading positions in products like toothpaste, laundry detergent, toilet paper, paper towels, deodorant, and diapers, to name just a few. If you are a fan of diversification, P&G offers you that in grand fashion, noting that it tends to play at the high end of the product categories in which it competes.

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A recent episode of The Ramsey Show had hosts Rachel Cruze and George Kamel tackling a tough financial and relational dilemma. A caller, Jeremy from Ottawa, Canada, reached out for advice after taking a drastic pay cut and moving his family 3,000 miles to be closer to his partner’s family. His income dropped from over $150,000 to under $50,000, leaving him struggling to cover bills and support his children.

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Jeremy asked, “I wanna know if it makes me a deadbeat father if I move back to my old job.”

Despite his good intentions to move closer to his family, Jeremy made it clear that they are struggling financially. He also expressed that his partner has further reduced her hours at her job, lowering their income even further.

As Kamel and Cruze questioned Jeremy about his situation, it became clear that he and his partner approach finances very differently and separately. Jeremy handles major expenses like the mortgage and one of their cars, while his partner manages other costs independently from him. They don’t combine their finances or share details about monthly expenses.

Cruze stated, “It’s sounding more like a relationship issue, Jeremy. It sounds like you guys aren’t generally doing well as a couple.” She noted that money concerns may be a symptom of their struggles, but a bigger problem within their relationship is not being addressed.

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Kamel suggested that Jeremy might need a “come to Jesus” conversation with his partner to address their financial and relationship strains. He stated that they need to lay it all out, clarify that they are not doing well financially and come together to discuss a plan to move forward.

“That’s what it’s going to take,” Kamel said. “And that’s when we lay out the finances together, get on a budget together and figure out what the hole is and how we’re getting out of it. And that might mean you need to find a higher paying job, she needs to work more hours, we need to combine bank accounts.”

Cruze reiterated these points, encouraging Jeremy to sit down with his partner to determine their minimum income to cover bills and how they can best achieve that. Cruze and Kamel both stressed that if Jeremy wants to make his relationship work, he and his partner must come together to solve their financial struggles – ideally with him staying close rather than moving 3,000 miles away from his family.

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Tech executives may be warming to Donald Trump’s return to the White House as his quick win sparks optimism for more spending and dealmaking.

“Business does a lot better when uncertainty goes away,” IBM (IBM) CEO Arvind Krishna told me at Yahoo Finance’s Invest conference. “We are hopeful that there is going to be a lot more innovation and less regulation. Those are both good for businesses across the board.”

Krishna believes a lighter regulatory environment will prompt clients to make investment decisions more quickly and also lay the groundwork for a more favorable deal environment.

“If we have more certainty on the outcome, then we are willing to lean into things like M&A … If the regulatory process and antitrust are going to be more certain, that allows you to take more risk,” Krishna added.

A shift toward less regulation would be a dramatic change for the industry, which has faced intense scrutiny from the Biden administration. Under FTC Chair Lina Khan’s leadership, regulators aggressively pursued cases against the industry’s biggest companies, including Amazon (AMZN), Apple (AAPL), Meta (META), and Alphabet (GOOG, GOOGL).

Trump, on the other hand, has promised to cut excess red tape, including his promise to throw out Biden’s executive order aimed at putting safety guardrails on AI — a move that would be viewed as controversial by those within the industry.

While Trump’s antitrust agendas remain uncertain, there seems to be growing optimism that he’ll employ a more hands-off approach compared to Biden.

“We expect tech stocks to rally further into year-end as the Street further digests a less regulatory spider web under Trump with Khan/FTC days in the rear view mirror, stronger AI initiatives within the Beltway on the way, and a goldilocks foundation for Big Tech and Tesla looking into 2025 and beyond,” Wedbush’s Dan Ives wrote in a recent note to clients.

Cisco (CSCO) CFO Scott Herren is confident in the company’s momentum heading into 2025. He told me on Yahoo Finance’s Catalysts that he feels “really good” about Cisco’s position, noting “strength across the board.”

“It’s hard to predict what’s going to happen from a political standpoint, but when you look at the things that are going to drive government efficiency, we’ve got the Department of Government Efficiency (DOGE) that’s about increasing productivity, and technology is always going to be critical to increasing productivity,” Herren said.

Despite optimism from tech leaders, investor sentiment seems a bit more cautious. Performance of the Magnificent Seven stocks, outside of Tesla (TSLA), has been lackluster since Election Day, hampered by risks associated with a stronger dollar and more tariffs.

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That could change quickly, Defiance ETFs CEO Sylvia Jablonski told me. AI, which has “essentially been all the rage” on Wall Street, remains in its “infancy,” with vast growth potential ahead, he said.

And IBM’s Krishna echoed this sentiment, citing AI as a key catalyst not only for IBM’s stock but the US tech sector overall.

“AI spending from our clients is going to increase … And automation spending is going to go up … I think that there is going to be more of an appetite for US technology globally,” Krishna said. “There’s going to be a lot more appetite to go invest in US technology from all over the globe.”

Since the start of the year, IBM shares have climbed more than 25%, outpacing the Nasdaq 100’s (^NDX) 20% jump.

Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.

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Most equity strategists consider a price-to-sales ratio above 3 to be extremely expensive.

However, individual stocks also trade at many times that level, including Palantir Inc. PLTR, which recently boasted a forward price-to-sales ratio just shy of 40, according to FactSet data.

Steve Sosnick, chief strategist at Interactive Brokers, said that in some ways, price-to-sales offers a more accurate picture of a stock’s valuation.

That’s because companies have far less discretion to make adjustments to raw revenue numbers.

“It’s easier for companies to massage their earnings than it is to massage revenues or cash flows,” Sosnick told MarketWatch during an interview.

This was, perhaps, the most widely used of the metrics included here.

The forward price-to-earnings ratio for the S&P 500 crossed above 22 in November for the first time since 2021, Dow Jones Market Data showed. This means stocks were richly valued relative to the profits these firms were expected to generate over the next 12 months.

Relative to the size of the U.S. economy, stocks have never been more expensive.

Taken together, every stock in the S&P 500 was worth 1.7 times the entire U.S. gross domestic product as of the end of the third quarter this past week.

Some call this “the Buffett Indicator,” although we should clarify that the standard version of the Buffett Indicator uses the Wilshire 5000, an index that captures all actively traded U.S. stocks, rather than the S&P 500.

But given that the S&P 500 captures the majority of total U.S. stock-market value, there lately has been very little daylight between the two ratios.

The indicator got its name from a comment Berkshire Hathaway Chief Executive Officer Warren Buffett once made to a reporter years ago, when he said that comparing the market capitalization of all U.S. stocks to the size of the U.S. economy offered the clearest picture of where valuations stand at any given moment.

However, the “Oracle of Omaha” has since distanced himself from his namesake indicator. One of Buffett’s assistants told MarketWatch a few months ago that throughout his adult life, Buffett has cautioned against trying to predict stock-market behavior.

Recently, some investors have been paying more attention to another Buffett indicator — the man himself. Berkshire’s decision to sell some stocks and build up its cash reserves has made some on Wall Street nervous.

Cash and equivalents, plus short-term U.S. Treasury investments, held by the conglomerate rose to $325.2 billion in the third quarter, a record high.

But before panic sets in, it’s worth pointing out that increases in Berkshire’s cash holdings have had little predictive power for markets in the past, according to one stock-market strategist.

Compared with historically elevated returns investors can reap from holding Treasurys backed entirely by the U.S. government, stocks may no longer offer a compelling return, given the additional risk.

At least, in theory.

The equity risk premium, which compares the S&P 500’s expected earnings yield with the actual yield on the 10-year Treasury note BX:TMUBMUSD10Y, slumped to its lowest level since 2002 this week, according to MarketWatch’s calculations.

While a negative premium suggests more risk-averse investors might want to stick with Treasurys and steer clear of stocks, the “ERP” in the past has remained in deeply negative territory for years, while the stock market kept on climbing. That was the case in the late 1990s, and it remained in negative territory as stocks tumbled after the dot-com bubble burst.

More conservative strategists have been howling about the decline in the ERP largely since the bull-market began. Its decline since the start of 2022 has mostly been driven by a rise in Treasury yields to levels last since before the 2008 financial crisis.

Moreover, while many stocks look expensive, it doesn’t mean investors can’t still find a good deal.

Small-cap and mid-cap stocks still look relatively cheap, several strategists told MarketWatch. Underperforming S&P 500 sectors remain, like healthcare stocks, materials and real-estate investment trusts.

But before diving into the bargain bin, it’s worth considering that the higher valuations of today might actually be justified. Some analysts think comparing today’s stock market to the market of yesteryear simply doesn’t make much sense.

That’s because, since the 1990s, the technology boom unleashed by the internet has changed many aspects of the U.S. economy.

And as long as companies like Microsoft Corp. MSFT, Apple Inc. AAPL and Nvidia Corp. NVDA can defend the sizable moats surrounding their businesses and continue growing earnings at a solid pace, investors have good reason to pay a premium for their shares, according to Nicholas Colas, co-founder of DataTrek Research.

Indeed, many of the biggest companies in the S&P 500 boast wider profit margins and lower debt than their predecessors from decades past. These firms tend to be “asset light,” meaning they don’t require heavy investment in factories and other capital goods. Because of this, their earnings have been much more stable from quarter to quarter.

All of this helps to justify higher earnings multiples, according to Ohsung Kwon, a strategist at Bank of America global research.

“Yes, valuations are more expensive today versus historical levels for sure,” Kwon said. “But there are reasons why multiples should be higher.”

Mike DeStefano contributed reporting

(Bloomberg) — If Wall Street learned one thing during Donald Trump’s first term as president, it’s that the stock market is a way he keeps score. At various points he took credit for equities rallies, urged Americans to buy the dip, and even considered firing Federal Reserve Chairman Jerome Powell, who he blamed for a selloff.

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Now he’s preparing for another stint in the White House, and the market is once again a key focus. The problem is he’s also bringing a series of economic policy proposals that many strategists say raise the risk of increasing inflation and slowing growth.

So for investors who’ve enjoyed the S&P 500 Index’s more than 50% jump since the start of 2023, the best hope for keeping the market rolling into 2025 and beyond may be Trump’s fear of doing anything to damage a rally.

“Trump considers the stock market performance as an important part of his scorecard,” said Eric Sterner, chief investment officer at Apollon Wealth Management. “He regularly started his speeches as president in his first term with the question, ‘How’s your 401K doing?’ when the markets were riding high. So he clearly does not want to create any policies that threaten the current bull market.”

The S&P 500 Index took off after Trump’s win on Nov. 5, putting up its best post-Election Day session ever. A whopping $56 billion flowed into US equity funds in the week through Nov. 13, the most since March, according to strategists at Bank of America Corp. using data from EPFR Global. And the S&P 500, technology-heavy Nasdaq 100 Index and Dow Jones Industrial Average have all hit multiple records since Election Day, despite last week’s pullback.

What makes the reaction notable is Trump’s campaign promises weren’t what you’d normally consider investor-friendly. They include: hefty tariffs that will potentially strain relations with key trade partners like China; mass deportations of low-wage undocumented workers; tax cuts targeted at corporations and wealthy Americans, which are expected to increase the national debt and widen the budget deficit; and a general protectionist approach aimed at bringing manufacturing back to America, where costs are higher than they are overseas.

None of these risks is a secret, they’ve all been widely discussed in investing circles. So where’s the enthusiasm coming from? Simple. Wall Street doesn’t believe Trump will tolerate a declining stock market, even if it’s caused by one of his own proposals.

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