In the midst of a massive sell-off in the market, it’s hard for investors to think of anything other than the misery prevailing at the moment. People are more concerned about what will happen five minutes from now than about where stocks will be five years from now, which is understandable.
However, it is also a mistake. Although hard to imagine under our current conditions, the current pullback is ultimately a buying opportunity…even if we haven’t yet seen an eventual bottom. You just have to keep in mind the long term.
With that as background, here’s a summary of three investments that might look like they’re in trouble right now, but should pay a lot of time for anyone willing to give them the kind of runway they deserve.
You may think of McDonald’s (NYSE: MCD) As a fast food chain. This isn’t exactly a target classification, though. For those in the know, a company is often described as a real estate company that happens to rent out exclusively to restaurant franchisees looking to add to their strong brand name.
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It is unlike any other fast food chain. While competing restaurant operators love Wendy Or Arby’s owns its own land and building, and McDonald’s franchisees don’t. Instead, as part of their franchise agreement, McDonald’s operators agree to lease their stores from the parent company. This is a cost in addition to royalties and other franchise fees typical of a company.
Here’s the franchisees advantage, And The upside for McDonald’s shareholders: Unlike mortgage payments on purchased properties, the rents charged to McDonald’s “tenants” are adjusted to reflect the market-based price of that property…in perpetuity. The franchisor – McDonald’s – is guaranteed not only recurring cash flow, but ever-increasing cash flow. However, franchisees don’t mind tidying, because they still tend to earn more running a McDonald’s store than they do any other fast food group.
This franchisor/franchisee structure is particularly well suited to financing a dividend, which McDonald’s has increased every year for the past 45 years.
to say Pinterest (NYSE: PINS) It’s been such a tough name to own lately that it would be a huge understatement. It’s been hard to hold on to, having fallen 80% over the past year.
Extensive selling is largely caused by user losses. As the impact of the pandemic recedes, many people who have engaged with the social networking site have stopped using it again in favor of doing more things in the real world.
But we are approaching a tipping point for the company’s user base. Now that it’s been about a year since it started to drain, don’t be surprised to see user losses start to diminish, or until you see new user growth as Pinterest’s pre-pandemic growth initiatives start operating again in a more natural environment. These initiatives include more financial incentives for content creators and brands, as well as a more accurate and effective advertising platform.
The encouraging irony is that despite the small number of regular users, the company continued to see financial growth. Revenue improved 52% in fiscal 2021, as last year’s earnings nearly tripled before interest, taxes, depreciation, and amortization (EBITDA), pulling the company out of the red into the black market on an operating basis. This year won’t be entirely heroic, but with several initiatives continuing to gain momentum, the analyst community is still calling for 20% sales growth this year before accelerating around 26% next year.
The market has to connect the dots sooner or later.
Finally, add DexCom (NASDAQ: DXCM) To your sure investment list, you’ll thank yourself for that later.
If you are not familiar with the company, it is very simple. DexCom creates continuous glucose monitoring systems (or CGMs) to help people with type 2 diabetes manage their condition. Its technology accounts for nearly 40% of the market, although that leading share hasn’t helped the stock much lately.
However, what is not currently reflected in DexCom’s stock price is how immature the CGM market is. As this sliver of the healthcare technology industry moves away from legacy solutions — including finger pricks — and toward CGMs, DexCom is expected to experience explosive growth.
Market research firm Technavio puts the idea into perspective, estimating that the highly segmented wearable glucose monitor market will grow at a rate of 12% per year through 2024, with CGMs making this company one of the industry’s major growth drivers. The North American market – where DexCom does about three-quarters of its business – is expected to lead the rest of the world on this front. Unfortunately, the continued deterioration of American diets and the increase in the incidence of type 2 diabetes only means that these growth estimates may be too conservative.
One thing is for sure either way – this year’s projected 19% revenue growth is neither coincidental nor unusual. The pace of growth next year should be even stronger, spanning more than a decade of quarterly improvements in uninterrupted sales.
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James Bromley has no position in any of the listed stocks. Motley Fool has posts on Pinterest and recommends them. Motley Fool recommends DexCom. Motley Fool has a disclosure policy.