Growth stocks typically lead the way during bull markets or periods of market recovery. We have seen this play out over the years, as recently as this year when surging technology stocks led the rally. But it is harder to find growth stocks that beat the market when it takes a downturn.
While no two markets are the same, investors can use the most recent bear market of 2022 as a guide in searching out which growth stocks might be best equipped to beat the market in a downturn. That's not to say another correction or bear market is imminent -- even the Wall Street experts and analysts usually get that wrong -- but if history tells us anything, it's that corrections happen, often when you don't expect them.
So, the best strategy is to build a diversified, long-term, all-weather portfolio that includes growth stocks that perform well when the broader markets do not. One great option is Visa(NYSE: V).
Visa has returned 19.2% per year since 2008
There is a lot to like about Visa, the world's largest payment processor. It has not only been one of the best growth stocks over just about any time period; it has also been remarkably resilient and steady, regardless of what the market is doing.
If you go back 15 years to 2008, the year that Visa went public, it has posted an average annual return of more than 19.2% as of Sept. 11. There are only a small percentage of stocks that have better returns when you look at a 15-year period that encompasses the Great Recession, the pandemic, and the 2022 bear market. If you go back just 10 years, the annualized return is similar, around 18.3%.
If we look at how Visa fared in the most recent market downturn, it was only down 3.4% in 2022. That is much less than the S&P 500, which fell 19% in 2022, and the Nasdaq Composite, which was off about 33% last year. For the one-year period ended Sept. 11, Visa was up 20.2% compared to the S&P 500, which had gained 10.2% over that same stretch. So, Visa beats the market over the long term, and it outperforms when the market goes south.
Why has it been such a consistently good performer? There are really three keys to it, starting with its market dominance.
Visa is the largest credit and payment processor by far in a market where there are really only four players. And two of them -- American Express and Discover Financial -- are not only much smaller but have different "closed loop" business models, meaning they have their own networks, serving as both lender and processor.
Mastercard is really the only other competitor that is similar to Visa in that they are both only payment processors working with banks or credit issuers that provide the loans. These two essentially form a duopoly, with Visa having a significantly larger network than Mastercard.
That brings us to the second key -- Visa's business model. It makes most of its revenue on swipe fees every time a transaction goes across its network, whether that's a credit card, a debit card, an online purchase, or whatever. So, it is relatively asset-light, outside of human capital; there's no product to manufacture, and not much real estate is needed for branches or offices or stores.
This leads to a wide operating margin, which is the amount of revenue generated against the cost of producing it. Visa has a ridiculously high 67% operating margin, which means it makes $0.67 in profit for every dollar of revenue after paying all costs to produce it. For most companies, an operating margin of half that is considered good. Ultimately, this type of efficiency creates lots of cash flow for Visa and gives it the capital to continuously invest in its business -- the third key.
Why you can count on Visa in a downturn
These three factors are the primary reasons investors should be able to continue to count on Visa, no matter the market environment. With its duopoly, most payments come through its network, so even if consumer spending drops, Visa likely won't lose market share and will maintain its dominance. Plus, it has plenty of liquidity to navigate a downturn without the credit risk that banks and issuers must face.
Also, the market should continue to grow as world economies increasingly shift to digital payments. With its established brand, huge network, and tons of capital, Visa is in a prime position to invest and take advantage of that shift.
It is a particularly good time to consider Visa because it looks fairly valued, given its massive growth potential, with a price-to-earnings (P/E) ratio of 31 and a forward P/E of 25. It is pretty much always a good time to buy this all-weather stock, but given its valuation, it looks even better right now.
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Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends Discover Financial Services 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.