E-commerce Stocks Positioned to be Big Winners

One relentless trend in America is that overall retail spending continues to grow every year other than recessions. Once, recessions are over, it's one of the first indicators to reach new highs. In the last recession, retail sales peaked in November 2007, bottomed in March 2009, and hit new highs in the spring of 2011.

This time, there could be an even steeper plunge given job losses and potential psychological effects of the negative economic shock from the coronavirus. However, like every previous recession, retail sales will bounce back when life returns to normal. While retail sales increased between 2 to 5% every year over the past decade, online sales grew between 13 and 18% every year over the same timeframe.

Currently, online sales make up 16% of total retail spending (not including food and energy). Given these trends and habits of Millennials and Generation Z, online sales will continue to take a bigger piece of the pie. Now, the economic shutdown has only accelerated this due to its convenience and necessity. Many physical retailers are not going to be able to survive or will see their advantages eroded, online retailers will emerge from a stronger position.

Here are some stocks to watch:

Chewy

Chewy (Nasdaq: CHWY) specializes in pet products. Pet ownership and spending on pets is another secular trend that will keep rising regardless of economic conditions. Chewy IPO'd in 2019 around $35 and currently is trading at these levels. It's certainly expensive given its $14 billion valuation and price to sales ratio of 3. However, it's growing revenue by 25% and has 22% gross margins and should hit profitability by next year. Chewy is a pure-play on online retail and pet spending, and its stock is poised to be a big winner in the next bull market.

MercadoLibre

MercadoLibre (Nasdaq: MELI) is basically the Amazon (Nasdaq: AMZN) of Latin America. It's been one of the big winners of the past cycle as it's up more than 400% over the past 5 years. Given these huge gains and high valuation, it's likely a bear market could lead to a steeper correction. The stock is growing sales by 57% compared to the same quarter, last year. Additionally, it sports an impressive 48% gross margin.

Wayfair

Wayfair (Nasdaq: W) is an online seller of furniture. A decade ago, people buying furniture sight unseen didn't seem likely. Today, it's pretty routine. Wayfair IPO'd in late 2014 around $40. For the next two and a half years. it traded in a tight range.

Over this time, the company's valuation improved as sales continued to grow. Then, it went on to quadruple from 2017 to the spring of 2019, topping out around $170. From there, the stock fell all the way to $25. Since the market bottom in late-March, the stock has more than tripled back to $80.

Wayfair's price action highlights that these stocks are full of risk and opportunity. Stocks with high multiples can see steep declines especially when growth-focused investors see revenue gains slipping and margins compressing.