5 Top Stocks for September

Some investors may have heard of the September Effect, which is a phenomenon in which

Some investors may have heard of the September Effect, which is a phenomenon in which stocks tend to drop slightly in September in markets around the world. Since World War II, the S&P 500 has dropped by an average of 0.5% in September. The Dow Jones Industrial Average, for its part, declines an average of 0.8% during the month.

So what should savvy, long-term investors do to outsmart the September Effect? Absolutely nothing. Speculating on what the market might do is not a good way to build wealth. Instead, focus your attention on finding great companies that have the potential to beat the market over the long term — September Effect be darned — and let the other investors worry about what month it is. 

To help you do that, a handful of Motley Fool contributors have put together a list of five top stocks for you to consider buying this month. Here’s why Chewy (NYSE: CHWY), Semler Scientific (OTC: SMLR), Peloton Interactive (NASDAQ: PTON), Amazon.com (NASDAQ: AMZN), and Shopify (NYSE: SHOP)  make the cut. 

A woman pointing at a computer screen.
A woman pointing at a computer screen.

Image source: Getty Images.

This pet play could be an investor’s best friend

Todd Campbell (Chewy): Chewy is a fast-growing e-commerce company that’s benefiting from millions of shoppers shifting purchases online because of Covid-19 restrictions. A purveyor of pet products, Chewy’s sales popped 46% to $1.62 billion in the first quarter, an acceleration from the 25% year-over-year growth in the fourth quarter.

The company’s strong start this year was due to a record number of new customers and growing adoption of its autoship service, which delivers commonly used pet products to customers on a set schedule. In Q1, autoship revenue increased 48% year over year to $1.1 billion as net sales per active customer improved 4.1% year over year to $357.

There’s no guarantee that first-quarter strength will translate into financials that beat expectations in the second quarter, but there’s reason to think Chewy could put up impressive results when it reports earnings on Sept. 10.

In addition to Covid-19 increasing its customer count, its bottom line could improve as unexpected fulfillment expenses that were necessary to meet spiking demand last quarter abate. In Q1, gross margin was 23.4%, up 50 basis points from last year. That’s good, but it would’ve been 1.2 percentage points higher if not for incremental fulfillment expenses in the quarter.

Overall, 84.9 million households own a pet, up from 79.7 million in 2016, according to the American Pet Products Association, and total spending on pets is expected to reach $99 billion this year, up from $95.7 billion in 2018. Given that Chewy’s trailing 12-month revenue is $5.4 billion, there’s still plenty of market share left for it to capture, making it a very intriguing stock to buy. 

High growth, reasonable price

Brian Feroldi (Semler Scientific): Peripheral artery disease (PAD) is a serious medical problem. This occurs when a person’s arteries gradually begin to narrow in response to a progressive buildup of sticky fat. Patients with PAD face a 21% greater risk of having a heart attack, stroke, hospitalization, or death within a year, so getting treatment is key.

The problem is that nearly half of people with PAD don’t even know they have it. That’s because there isn’t a fast and accurate way to diagnose PAD during routine medical visits.

An innovative small-cap company called Semler Scientific is on a mission to change that. The company is commercializing a product called QuantaFlo that they believe solves all of the current challenges of diagnosing PAD.

Here’s how QuantaFlo works: A small clip is placed onto a patient’s toes and fingers during healthcare checkups. QuantaFlo then measures blood flow to each of the extremities and produces a detailed report in minutes. If PAD is detected, the healthcare provider can recommend treatment options before the condition turns into a medical emergency.

Why should investors get excited? Semler aims to make money off of the reports that are produced, not the hardware. This provides Semler with a recurring-revenue business model that produces jaw-dropping margins (gross margin was 89% last quarter). In fact, the margins are so good that Semler has been producing positive net income and cash flow for years, even though its annual revenue was less than $33 million last year. 

COVID-19 has thrown a wrench in the company’s near-term growth, but I’m confident that the company’s growth rates will return once the pandemic subsides. Meanwhile, shares are currently trading around 30 times trailing earnings. Given the potential of QuantaFlo, I think that’s an extremely attractive price for a high-quality growth business.

Just getting its second wind

Dan Caplinger (Peloton Interactive): Companies that have been able to pivot to living conditions under COVID-19 have done extremely well in 2020, and Peloton Interactive has been a big winner in the fitness industry. As gyms closed down because of coronavirus concerns, Peloton saw demand for its in-home connected stationary bikes and treadmills soar.

In its most recent quarter, Peloton saw its total number of connected fitness subscribers almost double from year-earlier levels. Paid digital subscribers rose 64% year over year, and more than 2.6 million participate in Peloton’s service offerings in some way. Those numbers helped send Peloton’s total revenue above the half-billion dollar mark for the quarter, up 66% from the previous year. Retention rates of 93% show that the company is doing a good job of holding onto the customers it brings in.

Peloton comes up on its one-year anniversary of its IPO in September, and its stock has already roughly tripled from where it traded in its early days as a publicly traded company. Yet with an earnings report due out on Sept. 10, investors should get another good reading on how well the rising fitness giant is doing at taking advantage of its unique opportunity.

Some fear that Peloton’s success will wane once a permanent solution to COVID-19 is found. Yet for many, the experience of working out at home has been eye-opening. With all the comforts of home and all the benefits of a connected experience, Peloton offers fitness fans the best of both worlds — and many will likely stick with Peloton even after they can go back to their gyms with no restrictions.

Alexa, buy Amazon stock

Adam Levy (Amazon.com): Amazon stock is trading near its all-time high, but it’s still worth a spot in your virtual shopping cart.

Online sales have been booming amid the coronavirus pandemic as shoppers avoid trips to brick-and-mortar stores. E-commerce in the U.S. increased 44.5% year over year in the second quarter. Globally, that number’s up 71%.Importantly, early data show the shift to e-commerce is permanent, not a one-time spike.

Amazon grew online sales 48% in the second quarter, and it couldn’t keep up with demand. In fact, it took several measures to suppress demand in the first half of the year, including shutting off advertising and on-site promotions.

But as we head into the fall, Amazon’s ready to open the floodgates. It’s expanding its fulfillment network square footage by 50%, and its annual Prime Day is set for early October. Its marketing efforts are ramping back up, too, which ought to push sales even higher.

Amazon’s second-quarter operating margin of 6.6%, despite $4 billion in COVID-related expenses, was extremely impressive. While management expects operating margin to come back down as it increases its marketing spend, the second quarter results may show a sneak peak of Amazon’s long-term potential.

And don’t forget Amazon’s other avenues for growth. Amazon Web Services remains the leading cloud infrastructure and platform provider. Amazon’s advertising business is another fast-growing source of profits.

And Amazon’s always looking for new ways to grow. It’s shown significant interest in moving into healthcare with its acquisition of PillPack, its Haven Healthcare joint venture, a massive investment in building its own COVID-19 testing lab, and the recent introduction of its wearable Halo health band.

Some investors might balk at Amazon’s stock price, but there’s still lots of growth left.

A new way to shop

Chris Neiger (Shopify): The pandemic accelerated the e-commerce market, and Shopify’s business along with it. The company’s e-commerce platform helps businesses of all sizes set up and run their own online shops and with people spending so much time at home, this market is booming. 

Shopify’s second-quarter (reported July 29) sales spiked 97% from the year-ago quarter to a record of $714.3 million. To put this revenue growth into context, consider that the company’s previous revenue record was $505.2 million in Q4 2019, a holiday quarter during a booming economy.

Shopify’s phenomenal growth in the quarter was fueled mostly by the company’s Merchant Solutions sales, which popped 148% to $517.9 million. These sales were boosted by a 119% jump in gross merchandise volume (GMV) — the total dollar value of orders processed on Shopify’s platform — in the quarter, to $30.1 billion. 

Of course, one fantastic quarter alone doesn’t make Shopify a great long-term investment. Investors should be more excited that Shopify is also tapping into a massive e-commerce market that’s just getting started. 

At the end of 2019, just 11% of U.S. retail sales happened online. In the second quarter of this year that percentage jumped to 16%. This means that even with a pandemic that’s forced shoppers to buy products online more than ever before, e-commerce sales still only represent a fraction of the retail market.

Shopify chief operating officer Harley Finkelstein talked about the company’s e-commerce opportunity on the second-quarter earnings call, saying that the pandemic “has catalyzed e-commerce, introducing major changes in buyer behavior and pulling forward what retail would look like in 2030 into 2020.”  

If all of that weren’t enough to make the case for Shopify, consider that this fast-growing company has $4 billion in cash to invest in new tech and separate itself from its competitors. 

Shopify is already a leader in the e-commerce space, and its current growth is accelerating its lead. Even with the company’s shares up roughly 180% this year, I think the company will continue to be a driving force in e-commerce for years to come — and generate value for long-term investors as it grows.

More From The Motley Fool

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy owns shares of Amazon. Brian Feroldi owns shares of Amazon, Semler Scientific, and Shopify. Chris Neiger has no position in any of the stocks mentioned. Dan Caplinger has no position in any of the stocks mentioned. Todd Campbell owns shares of Amazon and Shopify. The Motley Fool owns shares of and recommends Amazon, Peloton Interactive, and Shopify. The Motley Fool recommends Chewy, Inc and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

5 Top Stocks for September was originally published by The Motley Fool

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