The stock market can humble even the most tenured investors.
Last year, Wall Street was taken on a historically wild ride. The benchmark S&P 500 lost more than a third of its value in less than five weeks -- the quickest decline of at least 30% on record -- and regained all that was lost to hit new highs in under five months. But nothing could prepare us for the extreme volatility associated with the Reddit frenzy over the past five weeks.
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The Reddit really leaves reason at the door
Without getting too far into the weeds, retail investors on Reddit's WallStreetBets (WSB) chatroom agreed to team up to buy into targeted companies. In particular, the WSB crowd focused on heavily short-sold stocks. Companies with high levels of short interest often have institutional investors or hedge fund managers betting against them. The WSB crowd was angling to drive the price up on these select stocks in order to create a short squeeze. In many instances, the retail investors were successful.
The poster children of this short-focused Reddit rally are video game retailer GameStop (GME 1.32%) and movie theater chain AMC Entertainment (AMC -0.66%). While both companies have had positive progress to report since the year began, the enormous gains seen in both securities simply don't match up with their underlying fundamentals.
For example, even though GameStop's e-commerce holiday sales more than quadrupled, total sales still fell by more than 3%. GameStop has always been a brick-and-mortar gaming company, and it simply waited too long to make the switch to a digital focus. In the meantime, it's been busy closing stores in an effort to backpedal its way into profits.
As for AMC Entertainment, the company managed to raise $917 million through a combination of share issuances and debt offerings between mid-December and mid-January. Though AMC has taken a few steps back from the proverbial cliff, its survival is far from guaranteed. It's not clear if a return to normal from the pandemic is in the cards before the end of 2021. The traditional movie theater model might not even survive, since streaming options like HBO Max are showing a selection of new releases the same day they hit theaters throughout 2021.
These are much better buys than AMC and GameStop
The point is, GameStop and AMC Entertainment are terrible companies that investors would be wise to ignore. If you want to double your money, the best way to do so is to buy innovative growth stocks with sustainable competitive advantages. The following trio of companies offers this X-factor, and are all poised to double in value.
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Trupanion
Perhaps no growth trend is as unstoppable as spending on companion animals. That's why it's likely we'll see cat-and-dog-focused health insurer Trupanion (TRUP -3.37%) double.
According to data from the American Pet Products Association, the percentage of households that own a pet has increased to 67%, as of 2019-2020, from 56% in 1988. It's been over a quarter of a century since year-over-year spending on companion animals has declined. With consumers opening their wallets to the tune of an estimated $99 billion last year, the well-being of their four-legged friends is clearly a high priority.
Trupanion is intriguing because it's only penetrated about 1% of the U.S. companion animal market. By comparison, approximately 25% of pet owners in the U.K. have pet health insurance. If market penetration grew to these levels in the U.S., Trupanion's addressable market would be north of $32 billion. For context, the company generated $502 million in 2020 full-year sales (up 31% from 2019).
Following a 33% increase in total enrolled pets in 2020 to almost 863,000, Trupanion looks as if it'll surpass the 1 million enrolled pets milestone this year. In two decades, the company has built up priceless rapport at the clinical level. It's the only major health benefits provider for pets with software that directly covers payment at the time of checkout.
Trupanion may be a two-decade-old growth story, but it's really just getting started.
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Lovesac
A small-cap growth stock with true staying power that should be able to handily outperform GameStop and AMC over the long run is modular furniture designer and retailer Lovesac (LOVE 2.22%). Yes, I did just say "furniture."
Although the furniture industry is typically stodgy, showroom-based, and run on thin margins, Lovesac is changing the game. With a focus on millennials, Lovesac's sactionals -- the company's best-seller, accounting for 81% of revenue -- can be reconfigured to fit virtually any living space. There are also more than 250 machine-washable covers that can be purchased for its sactionals, thereby giving consumers an abundance of choice and the ability to change a room's look in mere minutes. Best of all, the yarn used in these sactionals comes from fully recycled plastic bottles.
Not only is Lovesac's operating model environmentally sustainable, but the company is also demonstrating just how successful a furniture company can be when focusing on online sales. In the wake of the pandemic, more than half of all sales now originate on the internet. Though Lovesac hasn't abandoned its showroom partnerships or pop-up showroom concept, having a larger online presence is further driving down overhead costs. This is a big reason Lovesac will be profitable well before Wall Street anticipated.
This exceptional growth stock might be able to double its sales and share price by 2024, if not sooner.
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Fastly
A third and final growth stock that should be purchased in droves over the likes of GameStop and AMC Entertainment is cloud edge computing company Fastly (FSLY -0.87%).
The broad thesis here is pretty simple. Since the emergence of the pandemic, more businesses than ever have been creating an online or cloud-based presence. At the same time, more consumers are accessing information or services online. Since Fastly's core task is to securely and quickly deliver content to end users, its role as a content delivery specialist is only going to grow more important over time.
Given that Fastly's operating model is driven by usage, there are bound to be minor hiccups from time to time (e.g., TikTok parent ByteDance pulling most of its traffic off Fastly's network in Q3 due to an ongoing spat with the Trump administration). However, the data is crystal clear that existing customers are scaling right up with Fastly. The company's dollar-based net expansion rate (DBNER) in the fourth quarter was a robust 143%, which implies that existing clients are spending 43% more than they were in the preceding year. Total customer count and average spending per enterprise customer also rose.
If DBNER keeps advancing by more than 130% on a quarterly basis (implying 30%, or higher, year-on-year existing client sales growth), Fastly is going to have no trouble tripling its sales by 2024.
