If you’re nervous about the stock market, you’re not alone.
Investors weathered their first sustained bear market in more than 13 years. Inflation is as high as it has been in 40 years, and the economic disruption from the pandemic has made it nearly impossible to predict what will happen next.
For investors, a bear market can be nerve-wracking, but it also presents an opportunity to buy high-quality stocks that are on sale. If you have $1,500 to spare, about a week’s salary for the average, the three stocks below will probably grow it. Splitting the $1,500 three ways gives you a good mix of growth and survival.
1. Costco: A stock that beats the market in any economy
If there’s any brick-and-mortar retailer that deserves to be called bulletproof, it’s this one Costco (COST -1.29%). The warehouse retailer is the clear leader in the membership-based, buy-in-bulk category, and its base of 64.4 million households gives it a level of customer loyalty that the typical retailer doesn’t have. That membership revenue also allows the company to offer extremely low prices on goods.
Costco members love the chain for its low prices, quality products, great savings, and wide variety of merchandise. Its membership renewal percentage is over 90% globally and over 92% in North America.
The retail giant performed well not only in the brick-and-mortar channel but also online as it finally embraced e-commerce after years of avoiding it. Costco has proven its mettle throughout the pandemic, outperforming in the early stages of the crisis and more recently, even as peers. Walmart and Target saw profits shrink due to inflation and excess inventory. Adjusted comparable sales in the fiscal year just ended rose 10.6%, and its operating income rose 8% to $1.8 billion at a time when much of the retail sector is seeing revenue declines.
With the stock down more than 20% from its peak this year, Costco should reward long-term investors at the current price.
2. Alphabet: A digital advertising beast
parent of Google Alphabet (GOOG -1.79%) (GOOGL -1.84%) has long been a stock market winner because of one product. Google Search is the most successful advertising product in the history of the world and continues to deliver solid top-line growth and wide operating margins even as much of the rest of the digital advertising industry struggles due to challenges from to Apple ad-tracking transparency initiative and the rise of TikTok.
In its most recent quarter, Alphabet brought in $69.69 billion, an increase of 13% year-over-year, and delivered an operating margin of 28%. This was primarily driven by growth in Google Search.
Alphabet’s search product has a dominant market share in the world outside of China, and it continues to grow, as a search engine is an important utility in the modern world, and the demand to be on the search page of Google is rising. Its cost-per-click rate rebounded last year after a quiet 2020.
Alphabet stock looks well priced right now, trading at a price-to-earnings (P/E) ratio of just 19, though the S&P 500. Considering the business has long outperformed the S&P 500, and the company is gaining market share in digital advertising, Alphabet looks well positioned to beat the market from here.
3. ServiceNow: A reliable cloud winner
The software-as-a-service (SaaS) sector has taken off over the past year, and it’s easy to see why. The price-to-sales (P/S) ratios for many of these stocks are in the 30s or higher, and many of them are unprofitable. Too much growth has been priced in, and rising interest rates and recession fears have caused sudden shifts in market sentiment and valuations.
However, not all software stocks are unprofitable, and Service Today (NOW -2.38%) offers a great example of a larger, mature cloud stock that you can count on to deliver solid returns. ServiceNow offers a wide range of software products for IT services and operations, as well as customer service and workflows.
The company’s performance speaks for itself as it has a long track record of steady growth and profitability as the chart below shows.
NOW Operating Revenue (Quarterly YoY Growth) data by YCharts.
In its most recent quarter, the number of customers spending at least $10 million on ServiceNow topped 100, and quarterly non-GAAP revenue rose 29.5% year over year to $1.82 billion. Adjusted operating income was $399 million, equal to a 23% margin. And, with its backlog up 27% in currency-neutral terms to $12 billion, the company appears to be defying macroeconomic headwinds.
ServiceNow stock is down 40% from its peak last fall, and the stock looks very reasonably priced at a P/E ratio of 44 based on 2023 expected earnings.
With that growth and valuation, ServiceNow looks set to outperform in the next bull market.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Target. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Apple, Costco Wholesale, ServiceNow, Inc., Target, and Walmart Inc. The Motley Fool recommends the following options: long March 2023 $120 Apple calls and short March 2023 $130 Apple calls. The Motley Fool has a disclosure policy.