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The stock market has been full of contradictions lately. While some companies continue to trade at premium valuations, others have sunk noticeably from all-time highs. Was this decline in stocks with previously high valuations inevitable, or is this a temporary trend that the market can overcome as 2022 kicks off? In this segment of Backstage Pass, recorded on Dec. 15, Fool contributors Rachel Warren and Danny Vena discuss these market movements and some top stocks that investors can snag on sale right now.
Rachel Warren: Any stocks catching your eye right now?
Danny Vena: There’s just so many of them. With all deference to Jim Cramer I absolutely disagree with what he said that Connor [Allen, Fool contributor] was spot on with the fact that, we typically see high-volatility with these names. I think that’s what we’re seeing right now. I don’t think we’re going to see the end of high valuations for software-as-a-service companies. Because these are companies that have built a model where their profits suffer in the short term because they’re putting a lot of money into infrastructure.
But then once they hit that tipping point, every new customer that they attract to their platform drops to the bottom line. You see that hockey stick type growth happen. Sorry, Jim, I disagree. Now with that said, I wanted to share a chart here because there are just a couple of companies. I actually just came up with three right off the top of my head.
This is the trailing-12-month revenue growth for MercadoLibre (NASDAQ:MELI), ticker M-E-L-I, Sea Limited (NYSE:SE), ticker, S-E-A, and Snowflake (NYSE:SNOW),ticker S-N-O-W, ridiculously high growth rates.
MercadoLibre, you notice here, is at the bottom of that with 58% growth. But that is after 100% year-over-year growth for five successive quarters. Really tough comps and still 58% trailing-12-month, year-over-year growth. The other thing that I wanted to do here, and I’m just going to change a couple of settings here. Snowflake actually recovered some over the last couple of days, but it was down roughly 20%, 25%. Now it’s only down about 10% off its recent high. But look at Sea Limited and MercadoLibre, for companies that have ridiculously high growth.
They’re off 38% and 39%, respectively, off of their recent high prices. You’ll notice this is after some recovery from MercadoLibre. I’m a big fan of companies that have really high growth, that have software-as-a-service models and the potential to have that hockey-stick-like growth. I think all three of these companies do.
In fact, Snowflake’s revenue growth in the most recent quarter was 110% year over year. Lots of choices out there. I’ve already just started deploying my cash. There’s a couple of companies that I won’t be able to talk about until next week. [laughs] Come back and ask next week what it was I bought, and I will be happy to tell you that.
Rachel Warren: Yeah, MercadoLibre is one company in particular I’ve been following for a while and keep meaning to add to my portfolio. It’s been on my buy list for a while. I have a working list when I see stocks of interest that I want to study, that I add to.
For me, there’s so many stocks I’ve been watching. And I have to agree as well with you both, all due respect to Mr. Cramer. I think that we might be seeing this trend for a while, but I think the stocks with these once-high valuations can definitely rebound as their businesses are continuing to grow. But a couple of stocks that I’ve had my eye on that I’ve gotten to know pretty well because I write about them pretty frequently, are two cannabis stocks.
One is a cannabis REIT [real estate investment trust], Innovative Industrial Properties (NYSE:IIPR). Another one is perhaps a bit lesser known, and that’s GrowGeneration (NASDAQ:GRWG). GrowGeneration essentially is the leading supplier of hydroponics equipment to cannabis growers in the U.S. They provide the equipment that cannabis cultivators need to actually grow the substance.
But Innovative Industrial Properties. They currently have a portfolio of, I believe, just shy of 80 different properties. In the most recent quarter, the company grew its revenue 57% year over year. It recorded net income of about $29.8 million for the quarter, which I believe was up year over year. It has a pretty strong history of bottom-line growth.
One of the things that I like about this stock in particular, because it’s a REIT, it’s required to pay out 90% of its taxable income in the form of dividends. This company has a very strong track record of growing both its top and bottom line, and so its dividend has grown accordingly. I believe currently that yields about 2.5%.
GrowGeneration is another interesting company. They reported their results for the third quarter, not very long ago. Revenue was up triple digits on a year-over-year basis. Revenue was up 111% year over year. Same-store sales were about $59 million versus $51 million in the year-ago period. Another thing is the company has been growing a lot off of private-label sales of its various products, and that’s increasingly comprising more and more of its overall revenue as well as e-commerce revenue.
It’s been really growing it’s e-commerce presence as well, has a really strong cash position. Both stocks are trading down right now.
Actually I just want to share my screen really quick to show how these stocks have performed over the last few years here. You look at GrowGeneration, Innovative Industrial Properties, total return over the last few years. From four years ago, both were up by a considerable amount. Then you see over the last few years, that’s evened out a bit. Year to date, GrowGeneration’s trading down, Innovative Industrial Properties up and then there’s just been a bit of a dip there.
Maybe two stocks to take a look at if you’re interested in investing within the cannabis space. That space is typically one that is a little more volatile. But I do think it has some very interesting investment opportunities and it can be a good part of an overall diversified investment portfolio. Definitely, a couple of companies to check out.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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