If you have heard the siren song of penny stocks, step back and put your fingers in your ears. They may be exciting, but far too often penny stocks prove to be a waste of time and money. If you are still finding it hard to resist the draw of penny stocks, then consider these three alternatives instead: Shopify Inc. (SHOP 1.61%), Activision Blizzard, Inc. (ATVI), and Franco-Nevada Corporation (FNV 0.36%). Each of these stocks offer a fair amount of "excitement" and are better options than penny stocks. Here's why.
This e-commerce play could be a great long-term bet
Chris Neiger (Shopify Inc.): Instead of gambling your money away on a penny stock, hoping to make significant returns from a business you may not know much about, why not place a much safer bet on a company that has a transparent business, is already seeing huge sales gains, and that's setting itself up for a bright future? There are plenty of stocks that are a much better investment than diving into the murky waters of penny stocks, but Shopify stands out because it's not only an innovative and growing company, but its share price has already returned more than 400% since its IPO in 2015.
Image source: Getty Images.
Shopify is an e-commerce platform company that allows businesses of all sizes to sell their products and services online. Over the past few years, the company has amassed more than 600,000 businesses on its platform and in the most recent quarter revenue jumped by 62% year over year. Not only is this young company growing, but it's also surpassing many analysts' expectations. Shopify's revenue in the second quarter was $245 million, while Wall Street's consensus estimate was about $234 million, and the company's adjusted earnings per share of $0.02 outpaced the consensus estimate of an adjusted loss per share of $0.03.
While strong quarterly results are great, investors should be looking ahead to the massive potential Shopify has as an online retail platform company. Online sales accounted for only 9% of all retail sales in the U.S. in 2017 and will make up just 14% of all sales by 2021. This means that there's still tons of room for companies to grow their online sales -- and for Shopify to sell its platform to those companies as they expand.
Shopify's revenue gains, ability to add more and more customers to its platform, and the fact that it's betting on the emerging e-commerce market, all add up to a growth stock with lots more room to grow. Even if the company experiences some volatility as it grows, it'll still be a much safer bet than blindly picking a penny stock.
A video game company built for growth
Travis Hoium (Activision Blizzard, Inc.): If you're looking for a stock that's exciting like a penny stock might be, and that has a lot of growth potential, then Activision Blizzard is worth a look. The company is a leader in video games on mobile, consoles, and PCs. The Call of Duty, World of Warcraft, and Candy Crush franchises are key to the company's results and have driven consistent revenue growth and strong net income.
ATVI Revenue (TTM). Data source: YCharts.
What the chart above doesn't show is much of an impact from the booming esports business. Overwatch League launched earlier this year and has already shown the ability to draw millions of fans and fill NBA-sized arenas. Media companies and advertisers have already signed over $100 million of contracts with the Overwatch League and potential franchise owners are lining up to pay as much as $60 million for an expansion team, according to ESPN. It may sound crazy, but Activision Blizzard may be able to build an esports league that rivals major leagues like the NHL, NBA, and NFL in revenue long-term.
Overall, Activision Blizzard is riding great content and some industry trends working in its favor. Video games are becoming more intricate, difficult, and expensive to develop, which makes it harder for competitors to enter the market. When combined with Activision Blizzard's strong franchises and growing markets like esports, this is a stock with a great future ahead of it.
A more diversified approach to exploration
Reuben Gregg Brewer (Franco-Nevada Corporation): You'll find a lot of miners in penny stock land, often with one operating mine or nothing more than a mine in development. That's putting all of your eggs in just one basket in a big way. However, if you buy Franco-Nevada you'll get a lot of diversification and a growing dividend instead. That's a much better option in my book.
Franco-Nevada is a streaming company, providing miners cash up front for the right to buy commodities like gold in the future at reduced rates. Because of this it is best to think of streamers like Franco-Nevada as specialty finance companies with a portfolio of investments that they manage over time.
FNV price change. Data source: YCharts.
Currently Franco-Nevada's portfolio contains 50 operating mines (producing gold, silver, and other metals) and 57 producing oil and natural gas assets. These assets help support the dividend (the stock yields 1.3%), which has been increased every year for a decade -- an incredible achievement in the highly volatile commodity space. Behind these operating assets, however, are 36 mines in an advanced stage of development, 208 in the exploration stage, and 25 oil and gas exploration assets. These smaller investments give you diversified exposure to the big upside potential that lures people to penny stocks.
Not every investment will work out as hoped, of course. But that's the point. By investing in Franco-Nevada you are hiring experts who are focused on ferreting out the best opportunities and diversifying your investment so that no single mine can destroy your life savings. Meanwhile, you can sit back and collect a growing dividend while you avoid the ups and downs that are so frequent in the world of penny stocks.
Skip the pennies and stick to better fare
Penny stocks are best left to aggressive investors that can afford to, or are at least willing to, lose their capital. You should focus on companies with more material businesses. That includes Shopify's growing online sales platform, Activision's established video game franchises and growth opportunity in esports, and Franco-Nevada's broad mine portfolio, including both operating mines and exploration assets. If you take the time to do a deep dive on this trio of stocks, I'm sure you'll agree that they are better stocks than what you'll find in the realm of penny stocks.
