When it comes to your Roth IRA, a good strategy is to aim for holdings that will grow briskly. That's because the money earned in a Roth IRA can be withdrawn tax-free. Thus, it's smart to park at least some stocks in your Roth IRA that have the potential to be big long-term winners.
Here are three compelling candidates:
Image: Electronic Arts.
Electronic Arts (EA 0.02%)Electronic Arts is a powerhouse in the booming and profitable world of video games. It struggled in recent years, but CEO Andrew Wilson has been turning things around in a big way, with the stock more than doubling over the past year. And with its recent and forward-looking P/E ratios only in the low 20s, it's still not grossly overvalued.
Electronic Arts is generating about a billion dollars annually in free cash flow. Gross margins have been rising over the past few years, and net margins recently approached a hefty 20%. Part of the reason for the margin growth is a big push into subscription-based gaming, via its EA Access program, giving subscribers access to older titles. The industrywide move toward digital downloads of games is also boosting profits, as games no longer have to be printed, packaged, and stocked on shelves.
Other catalysts for the business include the relatively new Xbox One and PlayStation 4 consoles, which will boost demand for new games, and the company's push into mobile gaming, which is projected to generate $21 billion industrywide this year, with digital gamers spending a third of their dollars on mobile games. Mobile games are expected by some to hit $60 billion by 2017. Another promising catalyst is the upcoming Star Wars: Battlefront game, which will make its debut late in the year, along with the latest Star Wars movie.
Meanwhile, the company still has its strong franchises of Madden NFL, Battlefield, and FIFA -- and mobile successes with SimCity BuildIt, Madden NFL Mobile, and FIFA Ultimate Team. For its third quarter, the company posted revenue up 39% year over year, and more than 160 million monthly active users for its mobile games. The company certainly seems to have more room to run.
Image: Priceline Group.
Priceline Group Inc. (BKNG 2.05%)Priceline Group Inc was once known for its name-your-own-price airfare deals, but it's grown into an online travel juggernaut, having gobbled up Booking.com, Kayak.com, and OpenTable, among other successful businesses. It now offers discounted booking for airfares, hotels, car rentals, and vacation packages -- and now bookings for restaurants, too. Another recent acquisition is Rocketmiles, which will give Priceline an appealing loyalty program, via the ability to offer airline miles as rewards with bookings, boosting its appeal and competitiveness.
Past performance doesn't guarantee future success, but based on past performance, Priceline seems poised to continue growing significantly in a Roth IRA. Over the past decade, its revenue and earnings, respectively, have averaged annual gains of 25% and 54%. Its gross margins have soared from about 28% to 90% over that span, while net margins have popped from 20% to nearly 29%. In its fourth quarter, gross bookings rose 17% year over year, with earnings per share rising 20%. International bookings grew by 27%, which bodes well for the company's prospects, as much of its growth potential lies abroad. It's also an impressive number considering recent weakness in Europe and China.
Priceline stock seems appealingly priced, too. It has averaged annual growth of 46.5% over the past decade, but is down a smidge over the past year. Its P/E ratio was recently only 26 for such a fast grower, and its forward-looking P/E just 16, well below its five-year average of 30. Management has deemed its stock price attractive enough to get a $3 billion stock buyback program approved, with which to reward shareholders. Priceline might be even more profitable today if it weren't plowing a lot of money into advertising and into its businesses such as OpenTable and BookingsSuite. But such investments today can pay off powerfully tomorrow.
Facebook stock has been on a bit of a tear since it debuted.
Facebook Inc. (META 2.98%)We all know that Facebook is a big growth story. Its revenue and earnings per share, respectively, have averaged annual gains of 50% and 37% over the past three years, while its stock has soared. Yet with a forward-looking P/E ratio near 33, the stock doesn't seem too pricey at recent levels.
To understand the company's great growth potential, you just have to review a few numbers. As of the end of 2014, it had 890 million active daily users -- nearly a billion people -- a level up 18% over the year before. Its mobile active daily users numbered nearly as much, 745 million, up 34% from the year before. Even more intriguing, more than 80% of its active daily users are outside the U.S. and Canada.
Once you appreciate its great reach, think about what Facebook knows about most of us users, and what it can do with that information. It's already making a lot of money from ads on its site -- remember, its service remains free for its billion-some users -- and it's moving into video ads. It can use its data gathered on users to target ads so that they're more likely to be effective. Facebook's advertising revenue soared 65% in 2014, to $11.5 billion, its number of active monthly advertisers hit a whopping 2 million, and it grabbed market share from titan Google. It's impressively effective in advertising, too, managing to significantly reduce its number of ads in 2014's fourth quarter while boosting their average price more than fourfold. Meanwhile, Facebook is even threatening eBay's PayPal unit, adding a payment feature to its Messenger App.
Facebook can also leverage its broad base in others ways, such as by trying to enter the professional networking arena. And with annual free cash flow topping $3.6 billion, it has the ability to buy plenty of promising technologies. It has bought Oculus VR, for example, which offers virtual-reality technology, and the popular WhatsApp app as well. Most recently, Facebook bought TheFind, a personalized e-commerce search service that can strengthen its ability to offer targeted advertising to its users. The company has been a savvy acquirer -- think of Instagram, bought for $1 billion a few years ago and recently worth $35 billion, with some 300 million monthly active users.
Whether you buy these or other companies for your Roth IRA, look for strong and healthy growers, as any exponential growth that occurs in your portfolio will be available to you tax-free in retirement.
