The US stock market has been a bit volatile of late. Here in the UK, FTSE 100 investors have continued to enjoy the stability benefits that our flagship index is known for. But for those investing in US stocks or simply a S&P 500 tracker fund, the past few weeks have seen a bit of a wobble.
There are a lot of factors at play, such as index concentration and the war in Ukraine. However, it seems that most investor concerns are concentrated on the risk of a US trade war with Canada, Mexico, and China.
Given that tariffs are expected to trigger short-term inflation in America, a pause in interest rate cuts by the Federal Reserve is increasingly likely. Even more so given that US inflation has already been on the rise since August 2024, from 2.5% to 3%.
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Is a crash coming?
Could all these concerns trigger another stock market crash? Possibly. Although personally, I think a correction is far more likely. On average, the stock market tends to rise two out of every three years. And both 2023 and 2024 both delivered exceptional results. For reference, the S&P 500 jumped 55% while the Nasdaq 100 climbed 90% over this period.
However, whether a crash, correction, or continued upward momentum occurs later this year, my investment strategy hasn’t changed. Regardless of market conditions, I’m still laser-focused on finding top-notch stocks trading at bargain prices.
Where are the bargains?
With all eyes on tech giants like Nvidia and Meta Platforms, finding excellent value among large-cap tech stocks is likely going to be difficult, perhaps impossible. After all, if everyone’s looking for gold in the same place, most will find none.
Instead, my focus is on the smaller businesses that are seemingly flying under the radar. One position I’ve been steadily building up over the last few months is Toast (NYSE:TOST). The restaurant tech firm connects front-of-house to back-of-house operations, handling payments, orders, and payroll while managing staff, inventory and prices from a single platform.
By relieving the administrative headaches that restaurant operators must endure, Toast has already captured close to 15% of the US market, and international expansion’s now underway. Around 134,000 locations already rely on Toast’s ecosystem. And since the firm takes a small fee off each transaction, free cash flow generation is in abundance translating into a debt-free balance sheet.
Over the last five years, revenue growth has averaged just over 40% a year. Pairing that with a recent transition to profitability, the business appears to be firing on all cylinders. As for its valuation, on a price-to-sales basis, Toast’s trading at a ratio of around 4.1. That’s far more reasonable compared to Nvidia’s 23.4!
What could go wrong?
Toast’s revenue stream largely consists of fees from restaurant transactions. This cyclical exposure means that if US economic conditions deteriorate, Toast will likely suffer as fewer people eat out. Consequently, even at today’s seemingly reasonable valuation, the stock could suffer significant volatility in the short term.
It’s why I think drip-feeding capital over time is a more prudent approach in the current stock market environment.
