For beginning investors, the actual price of a stock can seem enormously important. Take one look at Alphabet, for example, and your jaw might hit the floor (it currently trades for over $1,000 per share). "Who has that kind of money to buy just one share?" you might think.
But as you get more experience in the market, you'll realize the nominal share price of any stock isn't that important. If you buy 10 shares of a $10 stock or one share of a $100 stock, you've invested the same amount of money: $100. And owning 10 shares, as opposed to one, does not mean you've gotten more for your money. In the end, what really matters is the difference between the price you pay for a stock and the price at which you sell it. So if that $10 stock sinks to $5, you've lost half of your money. If the $100 stock rises to $200, you've doubled it.
In my own personal portfolio, for instance, stocks that are under $100 account for just 35% of my holdings. Some of my biggest positions are in stocks that trade for over $1,000 -- like Amazon and Alphabet. That being said, paying over $100 per share may naturally seem like a psychological hurdle. A stock may also be prohibitively expensive for you -- for instance, you may not have $1,000 on hand to buy Alphabet.
Knowing that, I've compiled a list of five of my favorite stocks that are trading for under $100 per share. Here's a list of the companies, with a much more detailed explanation following. Quick note: "SaaS" stands for "software as a service" -- a business model we'll dive into below.
|Company||Recent Price||What It Does|
|Verizon (NYSE:VZ)||$54.00||Major telecom player|
|Veeva Systems (NYSE:VEEV)||$84.00||SaaS for pharmaceuticals|
|MondoDB (NASDAQ:MDB)||$79.00||Database SaaS provider|
|Axon (NASDAQ:AAXN)||$42.00||Stun gun and body-camera maker|
Unless you live under a rock, you're quite familiar with Walmart. One of the largest private employers in the world, the company has over 11,700 retail locations worldwide offering a wide selection of low-cost, everyday goods.
|Market Capitalization||$258 billion|
|3-Year Annual Sales Growth||2%|
|Cash/Debt||$13 billion / $44 billion|
|Free Cash Flow||$18.4 billion|
|Price/Free Cash Flow||14|
Why is Walmart a compelling investment?
There are two compelling parts to an investment in Walmart. The first is the decades-long lead it has in offering up goods at rock-bottom prices through its thousands of locations worldwide. Walmart's scale means it can negotiate low prices from suppliers and pass those savings along to customers.
The second prong of an investment in Walmart comes down to its recent pivot. While it's late to the e-commerce game, Walmart in the process of giving itself a massive makeover. Just two years ago, Walmart made a $3 billion acquisition of up-and-coming e-commerce logistics specialist Jet.com.
The results since then -- as far as e-commerce goes -- have been nothing short of extraordinary.
Note the enormous acceleration at the start of 2017. That was when the company was able to enjoy the full benefit of the Jet.com acquisition, as well as the expertise of its founder, Marc Lore.
But e-commerce alone isn't the only growth hook for Walmart. The company also paid $16 billion for a controlling stake in India's leading e-commerce player, Flipkart. Short-term investors haven't been thrilled about the move, as it reduced profitability and will take time to before sales from Flipkart start to show up on the income statement en masse. India's infrastructure and earlier stages in Internet adoption means that Flipkart won't achieve scale overnight -- it will take time. But long-term shareholders should love it, because it shows Walmart is focused on its long-term competitive advantages globally.
What are the risks, and what should we watch?
As anyone knows, Walmart isn't the top dog in e-commerce. That title goes to Amazon.com. Many thought Walmart couldn't accomplish the type of e-commerce growth it has earned working from Amazon's shadow -- but it has proved the naysayers (myself included) wrong.
There are four metrics investors should keep their eyes on to see how Walmart is performing:
- While growth rates will naturally slow, a dramatic, multi-quarter drop in e-commerce growth could signal that Walmart's strong showing was an anomaly. You want to see continued strength here.
- Likewise, Walmart must continue to grow market share in India via Flipkart. The Indian e-commerce market is still young. While Flipkart has a huge head start, it needs to maintain that position.
- Walmart has spent a lot of money on these acquisitions. The company can't afford to make too many more without risking over-leveraging itself.
- Over the past 12 months, the company used only 33% of free cash flow to pay out its dividend. That's a healthy payout ratio. If it ever creeps above the 80% threshold, the sustainability of the dividend could come into question.
What type of investor should consider Walmart stock?
Because of its stalwart status and dividend, Walmart stock is a favorite of investors nearing retirement. Right now, the company's 2.4% yield is better than you'll find in any money market or savings account. And with such a small percentage of free cash flow being used on the payout, there's a ton of room for growth in the future.
However, unlike money market or savings accounts, Walmart stock comes with the added risk of losing value via share-price depreciation. Investors who put their money behind the stock need to understand that it will take time (at least five years) for the investments in both Jet.com and Flipkart to potentially move the needle on the company's income statement. Walmart will have to spend money now to help both segments grow. But once they reach scale, incremental sales gains will start flowing to the bottom line.
Right now, shares are trading for 14 times free cash flow. I think that's a fair price. I don't own shares myself, as I'm many decades away from retirement and prefer faster-growing companies, but I think prices now are compelling.
Verizon is America's largest wireless and telecom provider. It helps connect the country via mobile phone plans and internet service for both businesses and residential consumers.
|Market Capitalization||$223 billion|
|3-Year Annual Sales Growth||0%|
|Cash/Debt||$3.8 billion / $108 billion|
|Free Cash Flow||$16.3 billion|
|Price/Free Cash Flow||14|
Why is Verizon a compelling investment?
Verizon spent much of the past five years trying to diversify itself into a fully fledged media conglomerate. It created "Oath" by acquiring AOL in 2015 and some of Yahoo!'s properties in 2017. That venture hasn't worked out, as the company recently announced a $4.5 billion write-off on the venture.
Rest assured, you'll hear more bad news about this -- but it's not part of the investment thesis here.
Quite simply, Verizon is the leader in connecting Americans. It's also the first to roll out a nationwide 5G Network, which will help it further expand its market share. Building out such a network is prohibitively expensive for most telecoms, meaning only the most cash-flush competitors can dream of matching Verizon's mobile data speed. Right now, AT&T is the only other competitor with such a war chest -- though T-Mobile and Sprint cannot be ignored either. They will eventually build out their own 5G networks, but they will be playing catch-up with Verizon.
Most important is this: Verizon has shown that it can capture and keep market share -- even after T-Mobile introduced un-bundling plans that significantly reduced the costs of switching to its network.
There's little doubt that demand for wireless connectivity will continue to grow, and Verizon is the leading provider. That alone makes it a compelling investment -- and helps explain why it can afford to pay out such a big dividend. Investors who buy shares today get a 4.4% dividend yield on their investment every year -- and as you'll see below, it's a payout shareholders can count on.
What are the risks, and what should we watch?
Verizon has already shown that it can occasionally throw good money after bad, making poor investments with its excess cash. We don't want to see that trend continue in the future.
But the most important thing to watch will be market share. Verizon needs to continue fending off AT&T, T-Mobile, and Sprint. It has shown an excellent penchant for accomplishing that, and the head-start in 5G is a big deal.
Meanwhile, the most important financial metric to watch is the company's free cash flow. It's from free cash flow that dividends are paid, and Verizon's dividend is by far the most appealing reason to invest in the stock. And currently, that dividend is sustainable. Only 60% of free cash flow was used on the payout over the last 12 months, meaning it's not only safe but has room for growth.
What type of investor should consider Verizon stock?
Verizon is ideal for investors who are near or in retirement. While the costs of building out infrastructure are high, the company is an absolute cash machine, bringing in $16.3 billion over the past 12 months. That sort of reliable cash stream, combined with a dominant market position, makes it a very safe investment.
Most of the gains you experience will likely come from the dividend. As an example, over the past decade, the stock has only advanced 89%, but shareholders who reinvested their dividends have enjoyed a 212% gain.
When Peter Gassner was an executive at Salesforce, he realized that pharmaceutical companies had specific needs when it came to cloud-based software applications. With that knowledge, he left to start Veeva.
Veeva has two broad umbrellas of products: Commercial Cloud, which offers tools to help drug companies manage their sales force and track customer relationships, and Vault, which acts as a repository for all of the mission-critical data that's collected while attempting to bring a drug through FDA trials and all the way to market.
|Market Capitalization||$12 billion|
|3-Year Annual Sales Growth||34%|
|Cash/Debt||$1.05 billion / $0|
|Free Cash Flow||$273 million|
|Price/Free Cash Flow||45|
Why is Veeva a compelling investment?
Veeva is growing like a weed. For its first seven years as a company, the core solution it offered was Veeva CRM, which helped a drug company's sales force keep track of customer orders. It wasn't until late 2013 that Veeva Vault entered the scene.
In the five years since then, the amount of revenue coming from Vault -- and the dizzying array of products that help drug companies streamline their processes -- has been a sight to see.
And if it appears that the growth is slowing, remember that those 2018 figures are for the trailing 12 months ending in October. They will undoubtedly be higher when the company reports fourth-quarter revenue in early 2019.
As it is, there are five subdivisions within Vault: clinical, medical, regulatory, quality, and -- starting next year -- safety. Each of these subdivisions has its own roster of tools that companies can use to help make the laborious task of keeping and tracking data easier.
And here's one of the greatest advantages of Veeva's business: As a drug company uses more and more Veeva products, the cost of switching to another provider rises. Between migrating all of that data to another cloud provider and training staff to use a new interface, switching away from Veeva could be an expensive and time-consuming proposition.
This "sticky" relationship between Veeva and its customers also makes it easier to sell new solutions to existing customers. Each of these new solutions not only raises the switching costs, but increases revenue without the need for much marketing.
Pay attention to this dynamic, as it will help you understand the next two companies as well.
What are the risks, and what should we watch?
There is little doubt that Veeva is becoming the go-to provider of cloud solutions for the pharmaceutical (aka "life sciences") industry. Back in 2014, 135 companies called upon Veeva for its Vault product. By the end of last year, that number had more than tripled to 449. As a result, fears that larger competitors with deeper pockets would outmaneuver Veeva have decreased markedly.
Investors want to see this trend of winning over customers -- and market share -- continue unabated. Veeva will continue adding more and more solutions in Vault. Some of them will take off, some won't -- that's OK. What matters is that there are enough popular and useful products to make the company's R&D dollars well spent.
By far the most important metric to watch is the company's subscription services revenue retention rate. This takes all of the subscription revenue from all of the customers in year one and compares that to the subscription revenue from that same cohort of customers in year two. This is a key metric because it backs out the effect of new customers and the service revenue associated with onboarding them. If this metric -- which is only released at the end of the fiscal year -- stays above 100%, it means that Veeva is keeping its customers on hand. If it's above 100%, it means customers are adding more and more tools over time.
Last year, the rate stood at an excellent 121%. It's important to understand that Veeva won't be able to keep that rate up forever, but so long as it stays well above 100% -- ideally above 110% -- it means that Veeva is both keeping its customers and selling them on more solutions.
What type of investor should consider Veeva stock?
Veeva's stock most definitely comes with risks. Right now, shares trade for 64 times trailing earnings and 48 times free cash flow. No matter what type of investor you are, those are expensive ratios.
As Veeva does not currently offer a dividend, the main reason for investing in the stock is the potential for share price appreciation. Shares of Veeva can be extremely volatile, so shareholders must prepare themselves for big swings. A slowdown in the company's growth rate, a major data breach, or an overall sell-off in the technology sector would likely cause shares to drop significantly, at least in the near term.
Growth-oriented investors who can stomach swift downturns are the best fit for stocks such as this.
Companies have more data to crunch today than they could ever dream of just a decade ago. But making sense of all that data is a huge task; without help, most companies would drown in the data. That's where MongoDB comes in.
|Market Capitalization||$4.3 billion|
|3-Year Annual Sales Growth (per year)||54%|
|Cash/Debt||$522 million / $214 million|
|Free Cash Flow||($44 million)|
|Price/Free Cash Flow||N/A|
Why is MongoDB a compelling investment?
Explaining exactly what MongoDB does can get a little complicated, but in essence, it offers companies access to an open-source database that crunches all the data it can collect. Such service has typically been dominated by Oracle. However, there's a key differentiator: Whereas Oracle's databases speak a language that's quickly becoming outdated (SQL), MongoDB functions on a different one (NoSQL) that is quickly gaining in popularity.
Here's the bottom line: MongoDB's new way of "squishing" data together is a lot more convenient for businesses to use. It's quickly gaining market share, which helps explain how the company was able to grow revenue by 54% per year over the past three years.
But what's equally exciting is how MongoDB is using the data collects -- and what it's learning from customers -- to make new and popular tools.
Take Atlas, for example. This is a database-as-a-service offering that allows customers to dump all the data they have on the cloud and have it analyzed. The uses are wide-ranging. The City of Chicago, for example, uses Atlas's data analysis to improve everything from trash pick-up to 911 responses. Coinbase, the platform for trading cryptocurrencies, uses Atlas to keep track of user identities, transactions, and payments.
In 2016, Atlas brought in just $1 million in revenue. During this year's third quarter alone, Atlas sales topped $14 million. The company has another potential blockbuster on its hands with MongoDB Stitch, as well.
Once a company starts using MongoDB's open-source data-crunching tools -- and storing said data on the company's servers -- the switching costs become very high. Sound familiar to the advantage Veeva Systems enjoys? It should, because at its core, MongoDB is also an SaaS company -- and that includes all the benefits of becoming more ingrained in its customers' businesses every day.
What are the risks, and what should we watch?
When Veeva started selling a one-stop shop for pharmaceutical companies on the cloud, it had a key advantage: It was the first to come up with such a product. While MongoDB might be the top dog in NoSQL technology, there are already legacy providers in place for databases -- namely, Oracle.
This is where switching costs are a double-edged sword. While switching costs are great once you have customers, they can be a royal pain when you're trying to get customers to dump their legacy providers. So far, MongoDB hasn't had too much trouble here: Its customer base grew 69% last quarter. But rivals with much deeper pockets still need to be monitored.
Additionally, investors need to be sure that MongoDB's "land and expand" strategy keeps working. In the simplest terms, this means the company wins over customers with its flagship offerings -- like MongoDB Charts -- and then those customers add new solutions as they become familiar with the interface. The best way to measure this is by watching the company's net annual revenue expansion rate, which has been above 120% for 15 consecutive quarters. This means customers are not only staying on at MongoDB, but adding more tools over time.
Finally, it's worth noting that MongoDB is currently losing money. The company's net cash position of $308 million gives it lots of breathing room, but positive free cash flows would go a long way toward alleviating investors' fears. You want to make sure those money-losing ways don't cause the cash balance to sink to a level where taking on more debt -- or issuing more shares -- becomes necessary.
What type of investor should consider MongoDB stock?
Like most SaaS stocks, MongoDB isn't cheap. It isn't profitable and hasn't produced positive free cash flow over the past 12 months. Additionally, it trades for 20 times sales. For comparison, its largest competitor, Oracle, trades for just over four times sales.
MongoDB might be great for an investor who has a multidecade timeline and can stomach huge moves in the stock price. Those looking for a less exciting ride might want to shy away. The premium price, unprofitability, and lack of a dividend all add up to make this the type of stock that near-retirees should approach with caution.
That said, the company is winning over customers in droves. And once they're in MongoDB's ecosystem, they're likely to stay for the long haul. This creates enormous and reliable revenue streams for the company -- and can lead to the type of compounding that creates fortunes for shareholders.
You might know Axon better by its former name: TASER International. Last year, the company changed its name to highlight its focus on police body cameras -- and the software that helps store and analyze all of that data.
|Market Capitalization||$2.4 billion|
|3-Year Annual Sales Growth||28%|
|Cash/Debt||$325 million / $0|
|Free Cash Flow||$49 million|
|Price/Free Cash Flow||50|
Why is Axon a compelling investment?
For years, Axon has had the stun gun market cornered. Its (formerly) eponymous Tasers are the non-lethal weapon of choice for police departments across the nation and, increasingly, around the world. But while that segment of the company is still important -- it has accounted for 61% of sales so far in 2018 -- it is the burgeoning body camera business that makes Axon so compelling.
To be clear, there's nothing terribly special about Axon's cameras that the competition couldn't duplicate. The real differentiator is the Evidence.com platform. That's where police departments store, analyze, and search through their gigabytes of footage to find what they're looking for. Users pay a monthly subscription to use Evidence.com. As with the previous two stocks, that business model sets Axon up nicely to benefit from the SaaS playbook.
While it still only accounts for roughly one-quarter of the company's revenue, take one look at the growth in revenue from Evidence.com and you'll see why investors should be excited.
For those of you keeping track at home, all of that growth is shown sequentially -- not year over year. Since 2015, this line of the business has more than doubled every year. Of course, as it grows larger, it won't be able to maintain such growth rates. But it also won't have to.
Just as exciting, Axon has a number of different products set to be released in the year to come. That includes a new stun gun (Taser 7) and body camera (Body 3). But most exciting is Axon Records, which intends to use the data captured and stored on Evidence.com to help officers complete paperwork more efficiently, freeing them up to spend more time in the community.
Putting all of these lines of business together, Axon believes it has an addressable market of $8.5 billion annually. Given its trailing sales of $400 million, that's an enormous amount of growth potential.
The cherry on top? With the acquisition of VieVu earlier this year, Axon is now operating without major competition in both the weapons and body camera businesses.
What are the risks, and what should we watch?
There are still a number of risks investors should be aware of. When your primary customers are government entities -- especially law enforcement agencies -- things can get complicated. Sensitive matters like who owns and has access to video footage can become major sticking points. And, as with all large agencies, it can take time to push new contracts through the bureaucratic system.
Additionally, there's a lot of buzz surrounding Axon's new records-management system. Field tests of the system have gone well enough that management is confident that it will roll out the system in late 2019. But if the AI that helps fill out paperwork isn't up to the task, it would be a major black eye for the company.
Finally, it's worth noting that Axon is playing the ultra-long game. It gave away its body cameras for free in early 2017 to get police departments in its ecosystem. It's doing the same thing with Axon Records for departments that buy a new Taser 7 plan. Those are great long-term moves, but they cost a lot of money to pull off. Over the past 12 months, Axon has brought in $49 million in free cash flow. While its $325 million war chest has no offsetting long-term debt, that free cash flow will need to remain positive to keep the company from seeking additional funding.
What type of investor should consider Axon stock?
Axon is not the type of stock a soon-to-be retiree should load up on. It does not offer up a dividend and trades for over 50 times trailing free cash flow. The slightest hint of a slowdown in business, macroeconomic problems, or unpredictable moves in the executive suite could sent shares tumbling.
That's why shareholders need to take the long-term view and remain laser-focused on the success of both Evidence.com and Axon Records if they want to separate the signal from the noise. If you're closer to retirement, consider giving Axon a smaller allocation in your portfolio.
A word about buying and allocation
Investors have lots of different ideas about buying and allocating to certain stocks. By far, the most important rule of thumb is to only make decisions that you're comfortable with and won't cause you to lose sleep. Over the long run, the stress of investing in stocks that are too risky for your taste will offset any gains they might achieve. Investing should improve your life, not make it worse.
As a rule, I never buy positions that are more than 5% of my overall stock portfolio -- though many grow to be much larger over time. And when I buy shares, I like to do so in "thirds." In other words, once I decide I like a stock, I'll devote roughly 1.7% of my portfolio (one-third of 5%) to it. As I study the stock, become more comfortable with it, and see it continue to perform, I'll gradually buy the second portion and, later, the final "third."
I find that by doing so, I never make the mistake purchasing too much of a stock that ends up being a major loser in my portfolio. This approach to buying stocks can be frustratingly slow and boring, but over the long run, boring is a good thing.
Starting 2019 off on the right foot
As I mentioned at the outset, there's no reason you should focus solely on stocks that are under $100. That said, these all represent quality stocks that are worthy of your own research.
I personally own Axon, MongoDB, and Veeva. Together, they account for over 15% of my real-life holdings. As I'm more than a few decades from retirement, stocks like Walmart and Verizon haven't yet found their way into my portfolio. That said, they are great stocks to form the foundation of a retirement portfolio.