The number of companies in the S&P 500 reporting positive earnings surprises for the third quarter is running below average over the past five- and 10-year time frames. Data from FactSet shows the companies that comprise the index are reporting their lowest earnings growth since the third quarter of 2020.
It’s made it a scary time to invest. Meta has plummeted 73%, Amazon is down 45% year to date, and Tesla is off 41%. The popular index itself is down 20%, which puts it in bear market territory.
Image source: Getty Images.
Yet as hesitant as it makes investors feel, market corrections truly are the best time to buy stocks because former high-flying growth stocks are now affordable again. It is Warren Buffett’s investing maxim of buying low and selling high: “Be fearful when others are greedy and greedy when others are fearful.”
If you have $1,000 to put into the market that you don’t need to pay bills or for emergencies, this is the perfect time to buy these two stocks.
1. Alphabet
Global search giant Alphabet (GOOG 7.75%) (GOOGL 7.58%) is another tech leader that has been brought low this year, with its stocks down 40% as advertising growth slows. It’s still expanding but at slower rates than previously, which has investors worried about whether it can resume its former upward trajectory.
While still a search powerhouse with $39.5 billion in third-quarter revenue, up 4% year over year, that is on top of a stellar year-ago figure, when revenue soared 44%. Its cloud services business is also growing quickly, soaring 38% to $6.8 billion. That puts Alphabet on a path to soon become the second-largest revenue generator, as it will likely surpass YouTube ads in the next quarter.
The broad growth across its various businesses indicates Alphabet is less at risk of violent swings in ad revenue, though certainly not immune to declines (YouTube revenue was down 2%, for instance). In comparison, Meta saw an 18% drop in the cost per ad in the third quarter, worse than the 14% drop it recorded in the second quarter.
Alphabet delivers massive amounts of free cash flow, more than $16 billion in the third quarter and $63 billion for the trailing 12 months, which has it trading at an attractive 17 times those cash profits while also going for 16 times next year’s earnings estimates.
There may be periods of slow growth ahead for Alphabet, but its market dominance (search) and available growth levers it can still pull (cloud services) mean there’s plenty of upside available in the stock.
Image source: Getty Images.
2. Airbnb
What is arguably the flip side to Google is Airbnb (ABNB 6.90%). The company is also down 42% year to date, but it’s transforming its business into one that does not depend upon search at all, but instead relies upon traffic coming directly to its site.
The company began transitioning away from search in 2019 and now is nearly self sufficient, preferring instead to get customers from brand marketing campaigns and public relations efforts.
CEO Brian Chesky recently said to analysts:
What happens if you turn off all your marketing? You know what happened? Almost nothing. Google did not want anyone to know this. But our traffic came back to more than 90% of what it was after we turned off all of our marketing.
Not every business can do that, but for Airbnb it’s working, and the third quarter saw revenue of $2.9 billion, the most it’s had in one quarter ever.
Although the short-term vacation rental platform saw bookings for nights and experiences drop below 100 million for the first time this year, they were still at a record high for the third quarter. Airbnb was able to compensate by raising prices, something most companies have had to do in this inflationary environment.
Business has improved across almost every metric, and Airbnb produced almost $1 billion worth of free cash flow for the quarter. Year to date, Airbnb has produced $3.3 billion in free cash flow.
It continues to break performance records. Although its torrid pace of growth achieved during the pandemic is slowing, analysts are still forecasting the travel and tourism platform’s stock has as much as 150% upside from where it currently trades. Airbnb just might be a place you want to park $1,000 for an extended stay.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb, Inc., Alphabet (A shares), Alphabet (C shares), Amazon, Meta Platforms, Inc., and Tesla. The Motley Fool has a disclosure policy.
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