Markets have gone on an absolute tear since October, with the S&P 500 up 31% and the Dow Jones Industrial Average up 24% from their 52-week lows. The rally has some saying we are in a new bull market. Others say the market still needs to reach other landmarks to qualify. But both sides can agree that optimism is high right now.
Concerns do still linger about the impact of higher interest rates on the economy. The Federal Reserve recently raised its benchmark interest rate again and it's now at its highest level in 22 years. There are still some indicators that point toward a potential recession in the next year or two.
If these concerns come to fruition and the market takes a dip, it could create an excellent opportunity to pick up what might become discounted shares of American Express(NYSE: AXP), MetaPlatforms(NASDAQ: META), and Tradeweb Markets(NASDAQ: TW). Here's why these are three stocks worth buying on the dip.
1. American Express
American Express runs the third-largest credit card network in the world, behind only Visa and Mastercard. What makes it stand out from those competitors is its strong brand that customers associate with luxury. Its high-end credit cards, like its Platinum card boasting an annual fee of $695, attract a premium customer base.
American Express's premium customer base helps make the business more robust. That's because its customers tend to be on the higher end of the credit score spectrum. Not only do these customers pose less risk to the company, but they also tend to weather challenging economic conditions, including recessions or inflation, better than others. This high-end customer base is why the company's charge-off rate on credit card loans of 1.8% in the first quarter was below the industry average of 2.9%.
Over the past decade, American Express achieved solid growth, with revenue per share and diluted earnings per share growing 10% and 8.5% compounded annually. The company also did an excellent job of growing through the pandemic and the recent inflation spike. In 2022, its network saw $1.5 trillion in transaction volume, up 21% from the year before, which helped its revenue grow by 25%. That solid growth continued in 2023, with its network volume growing 8% in the first half of the year, helping revenue grow another 12% from last year.
American Express has leveraged its strong brand to attract younger users, building on its strong network effects. According to the company's recent earnings release, millennials and Gen Z accounted for 60% of its new consumer accounts.
On a valuation basis, American Express stock is in line with its historical average over the last decade. However, a slowdown in consumer spending could impact its business and growth over the next year. There is concern over the restarting of student loan repayments in October, and a big cloud of uncertainty lingers over how this could affect the economy, young borrowers especially.
With credit card balances in the U.S. up 20% in the first quarter, credit card interest rates at their highest level all-time, and a threat to a consumer spending slowdown, American Express's business could slow down, and the stock could take a dip from here. If that were the case, the stock could be an excellent buy for long-term investors playing the subsequent rebound in the economy.
2. Meta Platforms
Meta Platforms has been on an absolute tear. Since bottoming in October, the stock has risen 272% from its 52-week low. Last year, the company battled fears about a slowing advertising market and ballooning expenses. The social media giant has since laid off tens of thousands of employees in what CEO Mark Zuckerberg calls a "year of efficiency."
Meta's long-term growth story remains solid. Its family of apps, which includes Facebook, Instagram, WhatsApp, Messenger, and other services, boasted nearly 3.9 billion daily active people in the second quarter.
Along with Alphabet's Google, Meta dominates the U.S. digital advertising space. This business has been a cash cow for the social media giant. Six months into this year, the company has brought in nearly $60 billion in advertising revenue, which has flowed through to a net profit from its family of apps of over $24 billion.
Meta faced criticism for its metaverse pursuits, which it accounts for in its Reality Labs segment. This segment has been a money pit for the company, and through six months this year, this segment has lost another $7.7 billion. While virtual reality hasn't gone mainstream, the project is a moonshot, which could result in staggering growth for Meta if things work out. According to a report from McKinsey last year, the metaverse could generate up to $5 trillion in value by 2030.
Meta stock has had a significant run-up from its October lows. As a result, it went from its cheapest valuation ever, a price-to-earnings (P/E) ratio of 8.5 at the end of 2022, to one of its most expensive valuations in the past five years, a P/E ratio of 37.9. If the ever-elusive recession does hit in the next 12 months, companies may cut back on ad spending leading to another sell-off in the stock -- which could be an excellent buying opportunity for long-term investors.
3. Tradeweb Markets
You could consider Tradeweb to be one of the earliest fintech companies. Formed in 1996, the company brought U.S. Treasuries trading into the technological age. Tradeweb has since branched out and offers trading on numerous products, including equities, European bonds, corporate debt, municipal bonds, money markets, and derivatives.
Tradeweb has a 14% share of a $9 trillion total addressable market, thanks to its dominance in interest rates and credit products. The company's commitment to customer service is a big reason it has been adding to its market share for several years.
Since 2017, Tradeweb's share of the U.S. Treasury market volume has grown from 9.4% to 18.4%. Meanwhile, its share of the U.S. Investment Grade market has gone from 9% in 2018 to 23.8% this year. It's also gaining ground in the U.S. High Yield market, with its 9.5% market share nearly triple that of 2018.
The company positioned itself well to continue adding market share through key partnerships. One of its major partnerships is with BlackRock, bringing its credit tradition solution to the asset manager's Aladdin execution management system.
Tradeweb stock has rallied 61% from its 52-week-low, and now its price-to-sales ratio (P/S) is above its average since going public. The trading exchange also has a one-year forward P/E ratio of 38.3 -- a lofty premium to competitors CME Group and Intercontinental Exchange, which have forward P/E ratios of 22 and 20.7, respectively.
While Tradeweb has posted stellar revenue growth of nearly 15% annually since 2016, that growth has slowed to 5% this year. As a result, a slowing pace of growth could lead to a sell-off in the stock if investors feel its premium valuation is no longer justified. Regardless, the company has done an excellent job of increasing its market share and would be another solid stock to buy if it takes a dip from here.
10 stocks we like better than American Express
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. American Express is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Courtney Carlsen has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Mastercard, Meta Platforms, and Visa. The Motley Fool recommends CME Group and Intercontinental Exchange and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
