The Motley Fool

A beaten-down growth stock to buy and 1 to avoid

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Businessman leading a chart upwards
Image source: Getty Images.

Soaring rates of inflation, combined with high valuations, have caused significant damage to several growth stocks recently. But while this these dips have led to some opportunities to buy, there are others where I feel the recent dips signal larger problems. Here’s one US growth stock I’d buy right now, and another I’m leaving on the sidelines.

70% revenue growth

MercadoLibre (NASDAQ: MELI) has impressed me repeatedly to the extent that it now makes up the second largest position in my portfolio. But while the MercadoLibre share price has managed to rise 24% over the last year, it has fallen over 13% over the past three months. I feel this dip makes this an excellent time to buy.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

For one, the Latin American e-commerce company is seeing huge growth rates. This was shown in its recent Q3 trading update, where it recorded net revenues of $1.9bn, a 73% year-on-year rise. The company also maintained its profitability, reaching net income of over $95m, significantly higher than the $15m recorded in the same period last year. While this still places the company on a very high price-to-earnings ratio of over 200, the firm is prioritising growth over profits, and therefore, I expect that profits are likely to continue rising over the next few years. This is a very good sign in any growth stock.

I’m also impressed by the company’s diverse revenue streams. Indeed, while the bulk of revenues come from the e-commerce business, MercadoLibre has a growing fintech service, known as Mercado Pago. In the third quarter, fintech revenues increased over 60% year-on-year to reach $632m. This should continue to supplement the very successful e-commerce business. I feel that this helps differentiate MercadoLibre from other e-commerce companies.

There are risks with it, however. For example, with a price-to-sales ratio of over 12, the stock isn’t cheap, and high growth is already factored in. The high rate of inflation will also cause issues, especially as MercadoLibre has a lot of debt. Despite these issues, its potential is too difficult to ignore, and therefore, I may buy more.

A ‘growth’ stock with limited growth

The Beyond Meat (NASDAQ: BYND) share price has suffered considerably over the past year, falling 33%. This has mainly been due to a series of disappointing trading updates. For example, in the recent Q3 update, it posted revenues of $106.4m, just a 13% rise from the same period last year. Gross profit margins also decreased from 27% to 21.6%, primarily due to increased transportation costs and higher warehousing costs. This also led to a larger-than-expected loss of $54.8m.

This had led to fears from some analysts that the company is “reaching market saturation faster than expected”. This isn’t a good sign for any growth stock. It also led to several brokers cutting their price targets for the stock. In fact, JP Morgan has recently implied that it has a 36% downside. 

Of course, there’s potential that the stock can rebound. This is especially true given that the global market for plant-based foods could see fivefold growth by 2030. But at the moment, Beyond Meat seems to be falling behind competitors. Therefore, I’ll wait for a further dip, or a change in the company’s fortunes before buying.

One FTSE “Snowball Stock” With Runaway Revenues

Looking for new share ideas?

Grab this FREE report now.

Inside, you discover one FTSE company with a runaway snowball of profits.

From 2015-2019…

  • Revenues increased 38.6%.
  • Its net income went up 19.7 times!
  • Since 2012, revenues from regular users have almost DOUBLED

The opportunity here really is astounding.

In fact, one of its own board members recently snapped up 25,000 shares using their own money...

So why sit on the side lines a minute longer?

You could have the full details on this company right now.

Grab your free report – while it’s online.

Stuart Blair owns shares in MercadoLibre. The Motley Fool UK has recommended Beyond Meat, Inc. and MercadoLibre. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.