People buy penny stocks because they think they'll make them rich, but penny-stock investing is often a fast track to the poorhouse, not to financial security. Because penny stocks can drop as quickly as they climb, a better investment approach could be buying proven companies that are already disrupting big and growing markets. What stocks fit that criteria? According to top Motley Fool contributors, Priceline (NASDAQ:PCLN), Celgene Corp. (NASDAQ:CELG), and Shopify, Inc. (NYSE:SHOP) deserve consideration.
The polar opposite of a penny stock
Brian Feroldi (The Priceline Group): I was drawn to penny stocks when I first started investing, so I understand their allure. However, as time passed, I learned that it doesn't matter how many shares of a stock that I owned. Instead, it mattered how much capital I invested in any given company. That's why, nowadays, I have no problem investing in "high-priced" stocks.
One stock that helped me finally kick my penny-stock habit to the curb was the Priceline Group. This company owns a collection of leading online-travel websites, including priceline.com, Kayak.com, Cheapflights.com, Rentalcars.com, Booking.com, and more. Each time a room, car, or flight is booked on the company's platform, it earns a nice commission. With consumers shifting their travel habits toward online channels, those commissions add up to huge revenue growth and big profits.
While owning this business might sound attractive, penny-stock investors will probably be turned off by the company's $1,770 share price, arguing that the stock is "too expensive" to own. I felt the same way back in 2010 when I first started buying. At the time, shares were trading for -- wait for it -- about $200 apiece. Thankfully, I decided to overlook the "high" price and buy, since that price actually represented a discount to where it was trading earlier that year.
As you can tell, I've been nicely rewarded for buying a few shares of this great business when it was trading on sale. Thankfully, a similar situation exists today. Shares were recently slammed after management issued tepid guidance for the upcoming quarter. While the share price still looks high, Wall Street estimates that the company will report more than $83 in per-share profits next year. Quick math tells us that the company is only trading for about 21 times forward earnings estimates, which isn't all that expensive for a company that's expected to grow profits in excess of 15% annually over the next five years.
My investing results got a whole lot better after I learned to ignore a company's share price and focus on business quality and valuation, instead. If you're a penny-stock investor, I'd strongly advise you to do the same.
Don't let this triple-digit share price scare you away
Sean Williams (Celgene): While the occasional pops seen in thinly traded penny stocks might seem alluring at times, your money would probably perform much better over the long run if it were invested in biotech blue chip stock Celgene. Though Celgene has hit a bit of a rough patch in recent months with the announcement that the company was reducing its full-year sales outlook for 2020 to a new range of $19 billion to $20 billion from a prior forecast of $21 billion, it's still on track to continue its streak of double-digit annual sales growth -- and that's nothing to sneeze at.
Leading the charge is Revlimid, the company's foundational blockbuster for the treatment of multiple myeloma and a variety of other cancer types. A confluence of factors that include longer duration of use, exceptional market share and pricing power, an increase in multiple myeloma diagnoses, and label-expansion opportunities, continue to drive double-digit sales growth for Revlimid. By early next decade, it could become the best-selling drug in the world. And most importantly, Celgene has mostly protected its key drug from generic competition through Jan. 31, 2026 by working out a settlement with generic drug producers.
Beyond Revlimid, Celgene has a promising pipeline, even if its latest 2020 outlook might make it seem otherwise. The company's experimental drug ozanimod has the potential to bring in up to $4 billion in annual sales if approved to treat multiple sclerosis, while existing therapies that include anti-inflammatory Otezla, and cancer drugs Abraxane and Pomalyst, can continue to deliver more than $1 billion in annual sales.
Celgene also has dozens of collaborations in its back pocket. The company has used its expansive cash flow to partner with a number of first-in-class cancer and anti-inflammatory drug developers, which could give Celgene a means to broaden its product portfolio in future years with minimal risk.
Don't let Celgene's $100+ share price scare you away. This is one giant that should be on your radar.
Investing in small businesses is a better idea
Todd Campbell (Shopify Inc.): Instead of gambling on penny stocks, how about investing in entrepreneurs? Shopify is a platform that enables new businesses to sell online, and in the past year alone, its platform helped create 350,000 new entrepreneurs.
Tobi Lutke founded Shopify when he tried his hand at his own retail store start-up and realized that there weren't any companies helping small entrepreneurs like him succeed online. Over the past 13 years, Shopify's gotten a lot bigger, but its core mission of helping entrepreneurs succeed hasn't changed.
Recently, Lutke explained to the Motley Fool how helping entrepreneurs is key to Shopify's growth. I highly recommend reading his interview with Motley Fool co-founder Tom Gardner (it's excellent), but even if you don't, you can get a pretty good feel for how this approach is panning out for Shopify by looking at its numbers.
Shopify makes its money by selling subscriptions -- and upselling features to merchants as they grow -- and processing transactions. As more entrepreneurs sign up on its platform and more transactions get processed, Shopify's financials improve. For example, third-quarter revenue grew 72% year over year, and revenue over the past 12-months eclipsed $580 million.
Importantly, Shopify's business could only be in the early innings of tapping its market opportunity. In the U.S. alone, new business starts have been uptrending since 2010, and according to the Small Business Administration, there are 29.6 million small businesses already, many of which could benefit from Shopify's solutions. E-commerce is growing quickly, yet it remains a small proportion of retail sales. According to the Census Bureau, e-commerce sales jumped 15.5% year over year in the third quarter, yet still only represent 8.4% of total U.S. retail sales.
This isn't a risk-free investment idea. Short-sellers have recently taken aim at the company, claiming its affiliate program is a scheme that's propping up its merchant numbers. While those concerns shouldn't be ignored, affiliate marketing is also used by other top e-commerce sites, including Amazon.com and eBay.
Shopify's affiliate program is designed to get more new merchants on board, and not all of them will succeed. However, some are, and that's translating into significant revenue growth for the company. While there are risks, adding Shopify to growth portfolios may make sense if you think people will continue opening small businesses and that those businesses will increasingly rely on the internet for sales.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Feroldi owns shares of Amazon, Celgene, and Priceline Group. Sean Williams has no position in any of the stocks mentioned. Todd Campbell owns shares of Amazon, Celgene, and Shopify. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Amazon, Celgene, eBay, Priceline Group, and Shopify. The Motley Fool has a disclosure policy.