It almost didn't matter which cryptocurrency you bought last year, as almost all ended the year higher than where they started. The high returns obscured the inherent risk of speculating in little-known and little-used currencies that, for the most part, lack any fundamental value.
Here's why these three Motley Fool investors like shares of Trupanion (TRUP 1.10%), Wheaton Precious Metals (NYSE: WPM), and E*Trade Financial (ETFC +0.00%) as better -- and certainly safer -- bets than cryptocurrencies.
A stock with far more "paw-tential" than crpytocurrencies
Sean Williams (Trupanion): While cryptocurrency returns in 2017 were astronomical, the virtual currency market has shown chinks in its armor in 2018. Rather than wasting your time grasping at straws, I suggest taking a closer look at domestic pet insurance company Trupanion.
Image source: Getty Images.
The thesis here is really simple to understand: Companion pets, such as cats and dogs, have been welcomed into American families with open arms. These families would be willing to do just about anything to ensure the health and well-being of their pet. According to the American Pet Products Association, pet owners, totaling 47.1 million households with at least one cat and 60.2 million American households with at least one dog, spent an estimated $69.4 billion on their pets last year. Of this, $16.6 billion was on veterinary care, with another $14.9 billion in supplies and over-the-counter medicine. Trupanion aims to step in and provide insurance coverage to help with some of these tens of billions of dollars in costs.
As noted in Trupanion's full-year report from mid-February, the company had 423,194 enrolled pets, a 23% increase from the prior year, but managed to grow revenue by 30% to $66.5 million. Quicker revenue growth relative to covered pet growth suggests strength in the company's premium pricing power.
What's more, the bulk of Trupanion's enrolled pets (371,683 out of 423,194) are attached to the company's higher-margin subscription business. The great thing about subscriptions is that it locks the consumer into a regular payment plan and presumably reduces the chance of a policy lapsing from nonpayment.
If there's a downside, it's that Trupanion isn't cheap in the traditional fundamental sense. It's slated to lose about $0.05 per share in 2018, and is only expected to generate $0.25 in full-year earnings per share by 2020. That'd place it above a price-to-earnings ratio of 100, even if its stock doesn't move for the next two or so years. However, it does have the potential to deliver annual sales growth of 15% or more over the next five years, is already generating positive cash flow, and is using this cash flow to better understand its consumer market to get more pet owners to enroll their "family members." Imagine how quickly Trupanion can grow if it gets an even better read on its clientele.
My suggestion? Ditch the cryptocurrency craze and give Trupanion a closer inspection.
Make your portfolio shine
Dan Caplinger (Wheaton Precious Metals): Before there were cryptocurrencies, investors who had doubts about the true value of fiat currencies gravitated to precious metals investments like gold and silver. Yet what many of those investors found was that buying physical bullion can be difficult and involve added costs for storage and safekeeping, while investing in mining companies creates the risk that an operational problem will cause massive share-price losses even when gold and silver prices are strong.
Wheaton Precious Metals has been one of the most successful answers to that dilemma, with its streaming model addressing those concerns. Wheaton offers financing to mining companies in exchange for the right to purchase production from their mining facilities at a discounted price. That gives Wheaton exposure to the success of its mining company partners, but it also insulates Wheaton from the direct losses that miners can suffer. Meanwhile, when precious metals prices rise, so too does the profit that Wheaton can gain when it collects and resells its streamed gold and silver. Some of that money gets paid out to shareholders because of the streaming company's cash flow-linked dividend policy, adding icing on the cake to the opportunity for share-price appreciation that Wheaton offers in a rising market for precious metals.
Selling the speculative dream
Jordan Wathen (E*Trade Financial Corp.): If the best way to make money in cryptocurrencies is by owning the companies that help people buy and sell them, the same may be true about stocks, too. It's my view that shares of E*Trade Financial Corp. offer an interesting wager on rising rates with the possibility that the company is sold at a premium to a competitor in the not-so-distant future.
The online brokerage industry is changing rapidly. Commissions are plunging, and investors who would have previously picked their own stocks are using passively managed ETFs and funds to invest for retirement. Meanwhile, new services like Robinhood, which doesn't charge a commission to place a trade, are making the business more difficult for retail brokers who charge a fee on every trade.
Major investors, as well as E*Trade's board of directors, have been public about their concerns with its slow growth. The board told executives last year to meet growth targets or it will consider selling the company to another brokerage, according to The Wall Street Journal.
E*Trade ended 2017 with more than $42.7 billion in client deposits, on which it paid next to nothing in interest, making its bank its crown jewel. As interest rates rise, these deposits become more valuable, as E*Trade should be able to earn a higher rate of return on its clients' cash and keep most of the benefit for its owners.
Though E*Trade shares currently trade at about 17 times the Wall Street consensus earnings estimate for 2018, I think it would be worth even more to a strategic buyer that can harvest more of its earnings power by eliminating duplicated expenses. Given its below-market price-to-earnings multiple, its sensitivity to rising interest rates, and the higher-than-average buyout potential, I think E*Trade is a very interesting stock with multiple ways to generate attractive returns.
