Market Volatility: Top Stocks to Consider During Recent Sell-Off
Wall Street recently reminded investors that stock prices do not consistently rise in a straight line. In the last three weeks, the Dow Jones Industrial Average, the broad-based S&P 500 (SNPINDEX: ^GSPC), and the Nasdaq Composite have experienced sell-offs of 7.2%, 9.3%, and 13.1%, respectively.
This decline is not surprising considering that stock market valuations have soared well beyond historical norms. The S&P 500’s Shiller price-to-earnings (P/E) ratio recently indicated that Wall Street’s most-followed stock index was trading at its third-highest premium since January 1871 during extended bull markets.
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While I maintain a long-term optimistic outlook and understand that quality businesses tend to increase in value over time, I cannot ignore the historical trend where significant corrections occur when the Shiller P/E ratio stretches too high. Historically, Wall Street’s major indices fall by 20% or more in such cases. Given this, I am currently searching for investment bargains but am not ready to buy just yet.
Image source: Getty Images.
During this market dip, several compelling stocks have caught my attention. The companies I am most eager to invest in are shares I already own. Out of the 35 stocks currently in my portfolio, I have identified five I am patiently waiting to buy more of.
Sirius XM Holdings
In a market characterized by high valuations, Sirius XM Holdings (NASDAQ: SIRI) presents a remarkable investment opportunity at a low valuation. Although there has been some slowdown in sales growth and subscriber numbers, I believe its strong competitive advantages will drive share price appreciation in the future.
Sirius XM’s licensing of satellite radio provides it with a competitive edge that terrestrial and online radio operators do not have. This legal monopoly allows the company to set subscription prices with more power than its competitors.
Moreover, Sirius XM’s revenue is diverse, with 76% of its net sales last year coming from subscription services. This mix allows for a more stable cash flow compared to companies reliant on advertising revenue. With a forward P/E ratio of 7 and a nearly 5% dividend yield, Sirius XM is a compelling investment. Should its shares dip below $20 again, I would be inclined to add more to my position, having last purchased at $20.55.
Alphabet
Another solid investment is Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), which has been part of my portfolio for almost three years. Although stocks in the “Magnificent Seven” group have been hit the hardest during this market downturn, Alphabet appears to be the most attractively priced among them.
Alphabet’s primary revenue driver is its search engine, Google, which has maintained a dominant market share of 89% to 93% in global internet searches over the past decade. This dominant position ensures strong advertising pricing power and substantial operating cash flow.
Looking ahead, Alphabet’s Google Cloud segment is positioned for rapid growth over the next five years as businesses increase their cloud spending. The integration of artificial intelligence solutions stands to further boost revenue growth in this segment.
Even though Alphabet’s forward P/E ratio sits at 16, historical trends suggest that its valuation may fall further due to emotional trading patterns. For patient investors, now may be a good time to buy, but I anticipate more volatility stemming from the stretched Shiller P/E ratio.
Image source: Pinterest.
As a top-five holding in my portfolio, Pinterest (NYSE: PINS) is another stock I am looking to acquire more of. I first bought shares in February 2020 during the COVID-19 market crash and last increased my position in April 2022.
Pinterest’s monthly active user (MAU) numbers have been climbing steadily, with 553 million users visiting its site regularly. Despite some temporary dips post-pandemic, investments in innovation, such as video content, have supported continuous MAU growth. This increase should enhance its advertising pricing power over time.
An advantage for Pinterest is its user-generated content model. Unlike many social media platforms that rely on data tracking for targeted advertising, Pinterest thrives on users sharing their interests organically. Hence, changes in data-tracking methodologies should not significantly hinder Pinterest’s growth.
Currently, Pinterest’s stock trades at 14 times its forward earnings. Given the challenges faced by advertisement-driven stocks, I would not be surprised to see Pinterest’s price fall from $31.39 down to the $25-$28 range, where I would be eager to buy more.
Fiverr International
A fourth investment opportunity worth considering is Fiverr International (NYSE:FVRR), which has also provided significant value to my portfolio. (Content not provided.)
Smart Investments: Expanding Positions in Fiverr and PennantPark
During the recent stock market sell-off, I am considering additional purchases of Fiverr International (NYSE: FVRR). I have owned Fiverr shares for less than two years, acquiring my latest shares in April 2024 at a price of $18.90 per share.
Fiverr is well-positioned to capitalize on the changing dynamics in the labor market. Although some businesses have mandated a return to the office, a significant number of employees are still working remotely compared to pre-pandemic levels. This shift benefits Fiverr’s online marketplace for freelancers, allowing it to thrive in the current environment.
While it is true that annual active buyers decreased from 4 million to 3.6 million in 2024 compared to the previous year, I find this less concerning given the increase in annual spending. In the fourth quarter, annual spend per buyer rose by 9% to $302, and the marketplace take rate climbed to 27.6%, an increase of 20 basis points year-over-year. This suggests that Fiverr’s strategy of targeting larger clients is proving effective, resulting in a higher share of the deals transacted on its platform.
At present, Fiverr International Stock trades at around 10 times forward earnings. If tech valuations continue to decline, I anticipate being able to acquire more shares of Fiverr around the $20 mark.
PennantPark Floating Rate Capital: A Reliable Investment Opportunity
Additionally, I plan to increase my stake in PennantPark Floating Rate Capital (NYSE: PFLT), a lesser-known business development company (BDC) that I have held since October 2023. PennantPark currently offers a monthly dividend, with its yield exceeding 11%.
The company has allocated some capital to buying common and preferred Stock in middle-market firms, typically considered riskier investments. However, most of PennantPark’s $2.194 billion portfolio is invested in debt securities. Middle-market companies often struggle to secure traditional loans, leading to higher interest rates on the loans they obtain from BDCs like PennantPark. This practice enhances the weighted-average yield of its loan portfolio.
Another advantage of PennantPark Floating Rate Capital is that its $1.964 billion debt securities portfolio is entirely composed of variable interest rate loans. The Federal Reserve’s interest rate hikes from March 2022 to July 2023 have significantly boosted PennantPark’s weighted average yield on its loans. Even as the Fed begins a rate-easing cycle, the company is still positioned to leverage higher loan rates.
Historically, sharp declines in the Stock market create temporary price discrepancies for PennantPark’s Stock. Typically, BDCs trade near their book value, which for PennantPark stood at $11.35 per share as of December 31, 2024. If the stock price moves significantly below this value, I will be keen to expand my holdings.
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Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board. Sean Williams has interests in Alphabet, Fiverr International, PennantPark Floating Rate Capital, Pinterest, and Sirius XM. The Motley Fool holds positions in and endorses Alphabet, Fiverr International, and Pinterest. Their disclosure policy is publicly available.
The views and opinions expressed herein reflect those of the author and do not necessarily represent those of Nasdaq, Inc.
