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Motley Fool Issues Rare “All In” Buy Alert
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The overall economy and prospects for a recovery have been the among the primary market drivers in 2022. While the data has checked many of the boxes that suggest the U.S. is in the midst of a recession, other metrics contradict that conclusion, leaving investors uncertain about where we stand. A key economic indicator released on Wednesday provided a bit of clarity, suggesting things are actually better than some had feared.
With that as a backdrop, semiconductor specialist Taiwan Semiconductor Manufacturing (TSM 4.60%) climbed 1.8%, streaming video pioneer Roku (ROKU 9.58%) jumped 2.7%, and e-commerce platform Shopify (SHOP 10.04%) rallied 3.3% as of 1:11 p.m. ET on Wednesday.
To be clear, there was nothing in the way of company-specific news driving Taiwan Semiconductor, Roku, and Shopify stocks higher today. This suggests that investors are reacting to a better-than-expected economic report, which suggests things are improving and that the worst of the bear market could be behind us.
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The U.S. Bureau of Economic Analysis released its revised assessment on the state of the economy, which showed that gross domestic product (GDP) for the third quarter not only returned to growth, but was also better than initially suggested. GDP increased at an annual rate of 2.9% during the third quarter of 2022 — up from its initial read of 2.6%. This followed declines of 1.6% and 0.6%, respectively, in the first and second quarters. The increase was also higher than the 2.7% economists had predicted.
The most commonly cited definition of a recession is two successive quarters of declining GDP. The data suggests that after suffering a downturn during the first six months of this year, the U.S. economy may be rallying toward a recovery. That said, some economists still fear a further contraction could materialize at some point in 2023.
The report noted that the upward revision was the result of more robust consumer and business spending.
The official decision regarding a recession in the U.S. comes from the economists at the National Bureau of Economic Research. The committee considers a vast array of economic indicators, including nonfarm payrolls, industrial production, and personal consumption spending, before making a final determination. Its decision has historically taken a year or longer and has been announced well into a recession or after the economy is already marching higher. The panel has yet to announce its official decision for the current business cycle.
The news wasn’t all good, as the price index for gross domestic purchases — a key gauge of inflation that excludes volatile food and energy costs — rose 4.6%, showing the continuing impact of rising prices.
The economy is complicated, and there is no magic number that shows the beginning or end of a recession. As a result, investors will continue to parse various bits of economic data for clues as to what the future holds. Furthermore, the broader economy — and our trio of stocks — will continue to be volatile for the foreseeable future. One read on the economy simply isn’t enough to draw any long-term conclusions.
Investors also need to remember that calling a bottom is a difficult, if not impossible, task. For those with the financial resources and a stomach for the volatility, investors are best served by buying shares in the best companies they can find and holding those stocks indefinitely — and Taiwan Semiconductor, Roku, and Shopify stocks are all worthy of consideration. Each is an industry leader and will continue to thrive once the downturn is behind us.
Furthermore, a rebounding economy would certainly provide a catalyst for Taiwan Semiconductor’s chip business, while increased consumer spending will no doubt increase demand for Roku’s streaming services and Shopify’s industry-leading e-commerce platform.
Furthermore, what were once sky-high valuations have become much more reasonable in the ensuing year, clocking in near all-time lows, though still not cheap in terms of traditional valuation measures. Shopify, Taiwan Semiconductor, and Roku are currently trading for 9.2 times, 5.8 times, and 2.4 times next year’s sales, when a reasonable price-to-sales ratio is between 1 and 2. That said, investors have rewarded stocks with historically strong growth with a premium valuation.
For investors planning to buy and hold for three to five years, these innovative companies, with valuations at or near historical lows, provide investors with a clear opportunity to generate impressive gains in the coming years.
Danny Vena has positions in Roku and Shopify and has the following options: long January 2023 $114 calls on Shopify and long January 2023 $116 calls on Shopify. The Motley Fool has positions in and recommends Roku, Shopify, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.
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