My 2 Favorite Stocks to Buy Right Now

Key Points

• Though there are some signs a bubble is forming, stocks could keep moving higher.

• Lululemon is struggling in the U.S., but the sports apparel stock looks like a bargain.

• Upstart has improved its technology and could capitalize on falling interest rates.

• 10 stocks we like better than Lululemon Athletica Inc. ›

Major indexes are hovering at all-time highs, and there are plenty of signs of a bubble forming. First, the cyclically adjusted price-to-earnings ratio, or CAPE, which takes the last 10 years of earnings into account, is at its highest point ever except for the peak of the dot-com bubble.

Valuations for development-stage companies with barely any revenue like quantum computing, electric vertical takeoff and landing (eVTOL) vehicles, and small modular nuclear reactors have all soared. Finally, investors now seem to be ignoring signs of a weakening economy, including a slowing job market.

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However, stocks could continue to move higher, given that AI demand remains robust, and Fed interest rate cuts typically juice the stock market. If you're looking for stocks to buy in the current environment, I'd recommend stocks that look to be undervalued rather than those already trading on all-time highs.

On that note, keep reading to see two of my favorite stocks to buy right now, and that look poised to outperform over the next three years.

Image source: Getty Images.

1. Lululemon

There's no doubt about it. Lululemon Athletica (NASDAQ: LULU) has had a terrible year. The athleisure apparel stock is down 58% this year as it's tumbled in each of its earnings reports this year on a series of weak results and guidance cuts.

Lululemon is facing pressure on multiple fronts. First, general consumer trends are moving away from leggings as workout clothes, choosing baggier pants instead. Lululemon is adapting to the trend, but it's moving away from its traditional strength in yoga pants. Additionally, management admitted that it's failed to keep up its styles fresh in lounge and social.

Finally, the company slashed its earnings guidance for the year due in part to the elimination of the de minimis exemption, which allowed the company to ship e-commerce orders from Canada to the U.S. without having to pay tariffs. The company is currently rearranging its supply chain to mitigate the impact of that issue.

Lululemon also has a plan to bring more new products to its selection, and accelerate its ability to respond to consumer demand and trends as the company said it lost same sales as it sold out of popular styles.

Turning around the business won't be easy, especially given the weakness in discretionary spending, but the stock is also dirt cheap at the moment, trading at a forward P/E of 12.6. Though the company is clearly struggling in the U.S., it's seeing rapid growth in China, where sales were up 25% in the recent quarter.

Lululemon is still a strong brand. If it can return to growth in the domestic market, the stock could soar.

2. Upstart

Upstart (NASDAQ: UPST) is also down from its earlier peak, but the fintech company has performed in a challenging macroeconomic environment.

The business struggled in 2022 when interest rates started rising, but the company has improved its key performance metrics like conversion rate thanks to an improved AI model. Upstart uses AI to screen loan applicants, and claims that its model is significantly better than the traditional FICO Score. Because of that, it's able to deliver better approval and default rates.

Upstart has now come a long way since 2022 as the business is delivering strong growth and is now profitable on a generally accepted accounting principles (GAAP) basis as well. Revenue jumped 102% to $257 million, and it reported a GAAP net income of $5.6 million.

Looking ahead, Upstart should be able to capitalize on the expected rate cuts coming up as that should boost demand for loans. Additionally, Upstart is rapidly gaining share in the massive auto and home loan markets.

Overall, Upstart is improving its technology, the business is delivering results, and the macroeconomic environment is getting friendlier. The stock could have a lot of room to run over the coming years.

Should you invest $1,000 in Lululemon Athletica Inc. right now?

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Jeremy Bowman has positions in Upstart. The Motley Fool has positions in and recommends Lululemon Athletica Inc. and Upstart. The Motley Fool has a disclosure policy.