2 Stocks Down 88% and 90% to Buy Right Now

Fintech stocks have been hit hard in the post-pandemic era as visions of a rapid transformation of the financial system have collapsed.

However, that doesn’t mean there aren’t opportunities, especially with interest rates falling across much of the world. Technology continues to improve, and the share of transactions on fintech platforms should continue to grow.

To take advantage of this transition, read on to see two bearish stocks that could offer big rewards.

Image source: Getty Images.

This downtrodden fintech could rise

Keith Noonan (StoneCo): StoneCo (STNE -0.18%) is a Brazil-based company that provides payment processing and other financial services to small and medium-sized businesses. The company also sells retail management software.

StoneCo had its initial public offering in 2018. Its shares have climbed to $94.09 in early 2021 on the back of a favorable macroeconomic backdrop for growth stocks and strong performance for its payments and credit businesses. However, the headwinds caused by the coronavirus pandemic have created major challenges for Brazilian businesses. The company’s use of unreliable government data when assessing whether loan applicants were creditworthy led to heavy losses and the temporary closure of its credit facility. Today, the stock is trading at about $11, down about 88% from its peak.

But while StoneCo shares continued to see some volatility, the company actually delivered some very encouraging results. Total payment volume (TPV) on its platform grew 25% year-on-year in the second quarter, and the company also saw a slight increase in the commission it took for facilitating transactions.

Due to the performance of its financial services offerings and efficiency initiatives, non-GAAP (adjusted) net income increased 54% year-over-year. Following strong Q2 results, the company appears to be trading at attractive valuation levels.

STNE P/E Ratio data (before) by YCharts.

StoneCo is now valued at about 9.5 times this year’s expected earnings and less than 1.5 times expected sales. The concentration of the fintech business in Brazil means that investing in the company comes with some additional macroeconomic risk factors, but there are also advantages that could come from being willing to tolerate a high potential for volatility.

The adoption of cashless payments and e-commerce remains at a much earlier stage in the Brazilian market than in the US, and companies that successfully facilitate growth in these categories could end up delivering big returns for shareholders. For risk-tolerant investors looking for fintech opportunities in international markets, StoneCo looks like a worthwhile buy-and-hold play.

Lower rates could reawaken this growth stock

Jeremy Bowman (Upstart): If you followed the stock market in 2021, chances are you remember Upstart Holdings (UPST 3.07%).

This fintech stock exploded out of the gate after going public in December 2020, generating triple-digit percentage growth and strong earnings before collapsing in the wake of the pandemic as its business was crushed by rising interest rates.

Parvenit with partner lenders originates consumer loans and uses a proprietary artificial intelligence algorithm to screen its applicants. It claims its screening method is significantly better than the conventional FICO score, allowing it to expand its pool of borrowers and offer more competitive rates than traditional lenders.

Like other lenders, Upstart’s business is very sensitive to interest rates, making the company a good bet to win as interest rates fall. The Federal Reserve just cut the benchmark federal funds rate by 50 basis points (0.5%) and is expected to cut it by another 50 basis points by the end of the year.

Lower rates should reignite demand for loans, and Upstart has expanded its business in recent years. It now offers home equity lines of credit in nearly half of the US, allowing it to tap into this huge market. It is also cutting costs through layoffs, which should help boost profits as loan demand recovers.

On the latest earnings call, chief financial officer Sanjay Datta described the interest rate cut as “unequivocally good for business” as it will both encourage lending and ease approvals. Although Upstart’s business has been stuck in neutral in recent quarters, its technology still looks promising, and the business should be buoyed by lower rates.

With the stock down more than 90% from its peak, there are many upsides if it can capitalize on this opportunity.