This sell-off isn't the least bit surprising given how far beyond historic norms stock market valuations have risen. Based on the S&P 500's Shiller price-to-earnings (P/E) Ratio, Wall Street's most-followed stock index recently traded at its third-highest premium during a continuous bull market when back-tested to January 1871.
Though I remain a long-term optimist and recognize that high-quality businesses increase in value over long periods, I'm not oblivious to the historic correlation that Wall Street's major stock indexes tend to fall 20%, or greater, when the Shiller P/E Ratio becomes notably extended to the upside. This is to say that I'm eagerly on the hunt for a bargain, but also not itching to the pull the trigger on most stocks just yet.
Image source: Getty Images.
While a number of magnificent stocks have caught my eye during the current sell-off, the companies I'm most-eager to add to are stocks I already own. Among the 35 stocks currently in my investment portfolio, here are five I'm waiting patiently buy more of.
Sirius XM Holdings
Amid a historically pricey stock market, satellite-radio operator Sirius XM Holdings(NASDAQ: SIRI) stands out for its unbelievably inexpensive valuation. Even though Sirius XM's sales growth and subscriber figures have hit a bit of a rough patch, I'm fully expecting its sustainable competitive advantages to boost its share price in the years to come.
One factor that allows Sirius XM to stand on a pedestal above other radio companies is its satellite-radio licensing. Being a legal monopoly should afford Sirius XM a level of subscription pricing power that other radio-based businesses lack.
What's even more important is Sirius XM's revenue diversity. Instead of being solely reliant on advertising like terrestrial and online radio operators, Sirius XM brought in 76% of its net sales last year from subscription services. Subscription revenue is more predictable and sustainable than ad sales, which leads to stabler cash flow in virtually any economic climate.
A forward P/E ratio of 7, coupled with a dividend yield nearing 5%, makes Sirius XM stock an intriguing deal. If shares were to dip to $20 or below -- my last purchase was at $20.55 -- I'd be a buyer.
Alphabet
"Magnificent Seven" member Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) has been a holding of mine for coming up on three years. Although Mag-7 stocks have been hit the hardest during the stock market sell-off, Alphabet looks to be the cheapest of the bunch.
Alphabet's foundational operating segment continues to be its search engine, Google. Data from GlobalStats shows that Google has sustained an 89% to 93% monthly share of global internet search looking back 10 years. Possessing a near-monopoly on internet search ensures that Google will maintain strong ad-pricing power and yield abundant operating cash flow.
Over the next five years, Alphabet's cloud infrastructure service platform, Google Cloud, should be able to spread its wings and rapidly increase cash-flow generation. Businesses are still reasonably early in their cloud spending ramp, and the incorporation of artificial intelligence solutions by Alphabet has the potential to accelerate sales growth for this segment.
While Alphabet is already cheap at 16 times forward earnings, historic correlations suggest the Magnificent Seven stocks will drive the major indexes lower. Though patient investors can't go wrong, in my view, buying Alphabet stock right now, I'm anticipating emotion-driven trading, along with historic precedent, vis-à-vis the Shiller P/E Ratio, will push its valuation even lower.
Image source: Pinterest.
Pinterest
Although it's already a top-five holding in my portfolio, social media stock Pinterest(NYSE: PINS) is another company I'm eager to add to. I first purchased shares of Pinterest in February 2020 during the COVID-19 crash and last added to the position in April 2022.
Taking a wide-lens approach shows that Pinterest's monthly active user (MAU) count has been trending higher for quite some time. Excluding some temporary hiccups following the worst of the pandemic, Pinterest's investments in innovation (e.g., video) have boosted its monthly MAU count to 553 million. Having 553 million people visiting its site monthly should steadily lift its ad-pricing power.
Another lure for Pinterest as an investment is its operating model. Whereas most social media companies rely heavily on data-tracking tools and likes to help advertisers target users with their message(s), Pinterest's entire platform is based on its MAUs willingly and freely posting about the things, places, and services they like. App developers changing their tracking tools should have little or no effect on Pinterest's growth runway.
Pinterest stock is already inexpensive at 14 times forward-year earnings. But with ad-driven stocks taking it on the chin during the current sell-off, I wouldn't be surprised to see Pinterest retreat from $31.39 per share, as of this writing, to the $25 to $28 range. That's where I'd love to start nibbling, once again.
Fiverr International
A fourth existing holding that I'm looking to buy more of during the stock market sell-off is online-services marketplace Fiverr International(NYSE: FVRR). I've held shares of Fiverr for less than two years, with the most recent purchase coming in April 2024 at $18.90 per share.
I view Fiverr as ideally positioned to take advantage of a materially changed labor market. While some businesses have required workers to come back to the office, a substantially higher percentage of people are working remotely than prior to the pandemic. This is the perfect environment for Fiverr's online freelancer marketplace to thrive.
While I'm not oblivious to the fact that annual active buyers fell from 4 million to 3.6 million in 2024 from the previous year, this isn't a big concern when taking into account that annual spend per buyer rose by 9% to $302 during the fourth quarter, and marketplace take rate jumped to 27.6%, up 20 basis points from the prior-year period. In other words, Fiverr's focus on bigger clients is allowing it to hang onto a higher percentage of the deals negotiated on its platform.
On an adjusted basis, Fiverr International stock can be purchased right now for about 10 times forward earnings. But if tech valuations continue to deflate, I believe I'll be able to pick up additional shares of Fiverr in the neighborhood of $20.
PennantPark Floating Rate Capital
The fifth magnificent stock that I already own (since October 2023) and am looking to add to during the current stock market sell-off is little-known business development company (BDC) PennantPark Floating Rate Capital(NYSE: PFLT). PennantPark pays a monthly dividend and its yield has now surpassed 11%.
Though PennantPark has put some of its capital to work buying common and preferred stock in middle-market companies (i.e., generally unproven businesses), the vast majority of its $2.194 billion investment portfolio is tied up in debt securities. Since middle-market businesses often lack access to loans and lines of credit, the loans they do receive from BDCs come with above-market interest rates. In short, it pumps up the weighted-average yield PennantPark generates on its loan portfolio.
The other great aspect about PennantPark Floating Rate Capital (which its name gives away) is that the entirety of its $1.964 billion debt-securities portfolio sports variable interest rates. When the Federal Reserve aggressively raised rates from March 2022 to July 2023, it sent PennantPark's weighted-average yield on debt investments significantly higher. Even with the nation's central bank now in a rate-easing cycle, PennantPark should have plenty of opportunity to take advantage of higher loan rates.
Historically, rapid moves lower in the stock market tend to create short-lived price dislocations in PennantPark's stock. Normally, BDCs trade very close to their respective book value, which for PennantPark was $11.35 per share, as of Dec. 31, 2024. It its shares move notably below its book value, I'll be eager to add to my position.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has positions in Alphabet, Fiverr International, PennantPark Floating Rate Capital, Pinterest, and Sirius XM. The Motley Fool has positions in and recommends Alphabet, Fiverr International, and Pinterest. The Motley Fool has a disclosure policy.
