3 stocks to add to your portfolio in a pull-back market

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Stocks are expensive right now, with the S&P 500 price / earnings ratio at its highest level since the dot-com bubble. This does not mean that investors should sell all of their stocks and wait for the next crash. It could be some time before a correction occurs, and this type of strategy would have missed the last year of market growth.

Still, some savvy investors have built more defensive portfolios and are waiting for a pullback to recover large companies that currently have aggressive valuations. These three stocks are great opportunities that you should consider if they get cheaper.

Nvidia

Nvidia (NASDAQ: NVDA) is a rockstar tech stock with exceptional growth catalysts, and it has returned over 230% since the pandemic market bottomed out in March 2020.

NVDA given by YCharts

Nvidia is the world market leader in graphics processors (GPUs) for PCs, with an 83% market share. The company supplies chips that are essential for games, high-performance video, and other applications that require more advanced visual hardware. The global video game market is expected to grow at over 12% per year over the next five years, and high-resolution video content continues to become the preferred medium for consumers. These factors alone provide catalysts for Nvidia for the foreseeable future.

However, Nvidia’s opportunity isn’t limited to games and personal computing. The company’s chips have important applications in data centers, the automotive and autonomous vehicle industries, artificial intelligence and automation technology, and 5G network infrastructure. Connecting to these trends offers an even more attractive growth opportunity.

What’s the catch here? Nvidia is expensive. Its forward price-to-earnings ratio of 55 is high compared to most other semiconductor stocks, and it is significantly above Nvidia’s recent all-time levels. Even the PEG ratio, which takes into account the company’s bullish growth forecasts, indicates a stock that looks expensive.

Graph showing the upward trend in Nvidia's PE ratio (Forward 1y).

NVDA P / E Ratio (1 year term) given by YCharts

Overall, it looks like Nvidia is a great stock to own, but there could be cheaper alternatives that can offer better fundamentals for the price. If there is a market pullback anytime soon, Nvidia should be one of the first stocks to consider for a lower price.

Happy children with stock market graph in the background.

Image source: Getty Images.

Chipotle

Mexican Grill Chipotle (NYSE: CMG) is a chain of well-known fast-casual restaurants. The company has managed to endure a handful of scandals and an unprecedented pandemic, and it continues to grow. The perceived value, nutrition, quality and convenience of the chain clearly resonates with consumers. With double-digit growth forecasts for this year and next, there doesn’t appear to be any reason to expect Chipotle to weaken anytime soon.

Chipotle offers many opportunities for continued growth that investors are excited about. It has fewer than 2,900 locations, less than half of its sales come from its digital channel, and delivery services only generate 1% of total revenue. The company generates substantial cash flow and the only debt on its balance sheet is related to operating leases, not loans. This limits financial risk and means Chipotle could easily find capital for growth should the need arise.

Again, the question here is really about the valuation. Chipotle has often attracted aggressive valuation multiples, and its futures P / E ratio of 56 seems more characteristic of a tech company than an established restaurant chain. Its enterprise value / EBITDA ratio of 50 indicates that this is not a situation in which earnings per share misrepresent true earnings. Chipotle is simply expensive to own. If the market offers you the opportunity to acquire stocks at a more attractive price, it is worth considering.

Visa

Visa (NYSE: V) is a household name with a brand that is almost synonymous with credit and debit cards. People see this logo every day, and it’s also featured on the front doors of countless restaurants and retailers that accept Visa cards. There’s more going on below the surface here too, and this company offers some exposure to a larger fintech revolution that’s happening.

Visa is actually a global payment processing network, rather than a credit card provider. It is a rapidly changing landscape with people like Square (NYSE: SQ), Pay Pal (NASDAQ: PYPL), countless ambitious start-ups and various blockchain solutions emerging to bring efficiency and security to digital payments and transfers.

Visa remains competitive by making acquisitions and forging partnerships with innovators who might otherwise become competitors. Regulators blocked its acquisition of Plaid and Visa pivoted by purchasing the B2B cross-border payments platform Currencycloud and Tink, a European open banking platform for consumers.

Visa offers a compelling business narrative, but its value as an investment is a little less straightforward. It’s hard to think of this as a value stock with a forward P / E ratio of 30.6 and a dividend yield of 0.6%. Like many other stocks, Visa is near the top of its recent range for the P / E ratio.

Graph showing the increasing trend of Visa's normalized PE ratio (annual).

V Normalized PE ratio (annual) given by YCharts

On the other hand, Visa is mature compared to other fintech stocks and does not have quite the same growth prospects. He is also in a difficult position as the ruling power in a rapidly changing industry. If we have a market correction, Visa would suddenly look much better as a value investment with more potential than most. If the stock’s price drops by around 15%, its PEG ratio would approach 1.5. At that assessment, I would buy Visa hand in hand as a cash flow generator with rare growth potential.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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