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2 Great Growth Stocks to Buy on the Dip Heading into June

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The past several weeks of trading were dominated by inflation fears that heated up following April’s 4.2% CPI jump. The largest 12-month climb since 2008 came on the back of ramped upped spending, government checks, supply chain setbacks, and comparisons against the coronavirus lows.

Wall Street has, however, seen buyers step in when they felt things were overdone, with the S&P 500 finding support above its 50-day moving average. The Nasdaq, which already suffered a correction in 2021 (down 10% from its highs), has regained its footing after its pullback. The tech-heavy index is once again trading above its 50-day moving average, while the benchmark index pushes back within around 1% of its records.

There appear to be multiple reasons behind the bullishness amid inflation worries. The overall earnings picture for Q1 was impressive and estimates for the second quarter and beyond keep going up. This positive bottom-line outlook helps support the possibility that U.S. GDP grows by 6.5% or more in 2021—its strongest in roughly 35 years (also read: Previewing Q2 Earnings Season).

Along with a booming U.S. economy, driven by the vaccine rollout, some Wall Street bulls might be focused on the likelihood that there is no alternative investing continues even if the central bank is forced to raise rates sooner than originally expected to tamp down rising prices.

The yield on the 10-year Treasury sits at about 1.57% at the moment, which is about where it was before the pandemic. And the 10-year yield has only gone above 3% a few times in the past decade. Plus, even though higher rates make growth tech stocks less attractive, it seems unlikely many investors would want to park their money in relatively low-yield bonds, even if rates rise—the annualized return for the S&P 500 is around 11% since the late 1980s.

Clearly, Wall Street will remain focused on inflation, and a large, sustained rise in prices might force the Fed’s hand. Nonetheless, investors might want to consider adding strong, growth-focused stocks as we head into June that are still trading below their highs as the market bounces back…

 

Pinterest (PINS - Free Report)

Pinterest is a rather unique social media company in a world dominated by Facebook and its various other platforms. PINS is essentially a visual discovery platform. The firm allows users to find and search for products, services, and more, from planning trips and coordinating an outfit to making home-cooked meals, learnings how to remodel or decorate a room, and beyond.

PINS has become a hit with advertisers, small businesses, entrepreneurs, and do-it-yourself enthusiasts. The company has thrived in the e-commerce and digital media age as fewer people flip through magazines or catalogs for purchasing inspiration. Plus, paid content and ads fit seamlessly into Pinterest, which is vital in our digital-heavy ad world where people pay to avoid ads on Netflix (NFLX - Free Report) and largely ignore more traditional banner ads.

The company’s FY20 revenue surge 48% to $1.69 billion to nearly match FY19’s 51% sales growth. PINS also added over 100 million new users last year to close 2020 with 459 million. It then topped our Q1 estimates at the end of April, with global MAUs up 30% to roughly 480 million. PINS executives also provided strong guidance that sent its consensus earnings estimates soaring, with its adjusted FY21 EPS figure 34% higher and FY22’s up 27%.

Zacks estimates now call for its FY21 revenue to climb another 52% from $1.69 billion to $2.57 billion, with FY22 expected to surge higher 36% (adding nealry another $1 billion) to come in at $3.50 billion. Alongside its impressive top-line growth outlook, PINS adjusted EPS figures are projected to soar 117% this year and 39% in FY22.

Pinterest has blown away our earnings estimates in the trailing four quarters and its positive revisions help it land a Zacks Rank #2 (Buy), alongside its “A” grade for Growth in our Style Scores system.

Pinterest is a prime example of a growth-focused technology firm that thrived during the tough early coronavirus environment. PINS was the beneficiary of its own strengths and gained on the back of wider market exuberance off the virus lows.

The stock is up 230% in the last year to destroy the Zacks Tech Sector’s 51% run and fellow standouts like Shopify (SHOP - Free Report) and Etsy (ETSY - Free Report) . Luckily, the stock has cooled off and closed regular hours Wednesday at roughly $63 a share, or 30% below its mid-February highs.

The stock had recouped nearly all of its losses following its February pullback, but it fell again in early April. PINS popped out of oversold RSI (30) territory earlier this month, as it attempts to regain some of its momentum, but it still sits below neutral RSI (50) levels at 47. On the valuation front, PINs trades 15% below its own year-long median at 13.8X forward 12-month sales and below fellow social media-style firm Snap’s (SNAP - Free Report) 19.3X.

Pinterest is ready to remain a hit with advertisers and users as people disconnect from traditional media. And a recent Wall Street Journal article highlighted the company’s successful use of artificial intelligence to boost “its user and ad-revenue numbers at a much faster pace than most of its social-media peers.” The company is also improving its video capabilities. And 14 of the 20 brokerage ratings Zacks has are “Strong Buys” or “Buys,” with none below a “Hold.”

Chewy (CHWY - Free Report)

Chewy, like PINS, was designed to succeed during the remote environment. More importantly, e-commerce was already booming long before the pandemic and people utilizing delivery, especially automated delivery for essentials they know they need such as pet food, are unlikely to go back even as they start to eat out and take vacations as the vaccine push rolls on in the U.S.

CHWY is an e-commerce pet store with relatively speedy delivery. The firm sells pet food, supplies, treats, medications, and nearly anything else imaginable for a wide variety of animals. CHWY was founded in 2011 and went public in 2019 and has carved out a niche within a crowded digital commerce world dominated by Amazon (AMZN - Free Report) , Target (TGT - Free Report) , and others.

Chewy has expanded its offerings to make it more of a player in the pet industry that isn’t going out of style. CHWY last October launched its telehealth service called Connect with a Vet. The telehealth service, only available to autoship customers, could be a hit as people opt for convenience where they can. The firm, which also boosted its pharmacy offerings, announced on May 21 the expansion of its telehealth service to include free video consultations, extended hours, and more.

Chewy’s 2020 revenue surged 47% to $7.15 billion to beat FY19’s 37% sales expansion. The company also reported its first quarterly profit in Q4, crushing our bottom-line estimates. Overall, the digital pet store giant added 5.7 million net active customers last year, up 43% to close the year with 19.2 million.

Zacks estimates call for its 2021 sales to jump 25% or $1.8 billion higher to reach roughly $9 billion, with FY22 projected to see it add another $1.7 billion, or 20% stronger revenue. Meanwhile, its adjusted earnings are expected to skyrocket 122% to $0.20 a share this year and soar another 150% in FY22. Chewy is set to release its Q1 results Thursday, June 10.

The nearby chart showcases CHWY’s improved earnings outlook that helps it land a Zacks Rank #2 (Buy), next to its “A” grade for Growth. Furthermore, CHWY’s autoship business that allows people to have dog food and anything else delivered automatically at predetermined intervals accounts for roughly 70% of its total revenue. This creates consistent revenue streams among loyal pet owners.

Chewy was another big winner in 2020 and it’s still up 85% in the past year. But the stock has tumbled since mid-February (when growth stocks started to get crushed), with it down over 35% from its records at $74 a share. Like PINS, the stock has popped recently after it went into oversold RSI territory.

CHWY also trades at 3.2X forward sales, which marks a 15% discount to its year-long median. Some investors might want to wait for more signs of a comeback before considering Chewy, but longer-term investors don’t need to worry as much about trying to time the stock.

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