Penny stocks are the get-rich-quick scheme of investing. But like most wealth-building shortcuts, they often end in disaster. Considering the deceptive and desperate measures undertaken by penny stock scammers, it shouldn't be too surprising that most "investments" in microcap companies disappear into thin air. The overwhelming evidence makes it clear: Don't waste your time or money!
Instead, individuals looking to build long-term wealth can rely on the tried-and-true method of buy-and-hold investing. While it's simple, it's not easy. But investors who can suppress bias and emotion to buy great businesses and hold on for sufficiently long time periods can sleep soundly at night.
We recently asked three contributors at The Motley Fool for their top stock picks right now that fit the bill. Here's why they like Enterprise Products Partners (NYSE:EPD), Square (NYSE:SQ), and Franco-Nevada (TSX:FNV).
A leader of the American energy revolution
Maxx Chatsko (Enterprise Products Partners): Perhaps OPEC hasn't figured it out yet, but every time the cartel agrees to production cuts, it's really just handing over market share to American oil and gas producers. Thanks to unparalleled expertise and a steady stream of new technology, shale oil and gas from the U.S. are among the cheapest in the world. Combine that with brand-new export infrastructure, and the fact that market-driven domestic producers really don't care about production quotas, and OPEC's relevance is waning by the barrel.
Enterprise Products Partners is one of the companies positioned to capture the most benefit from America's redirection of global energy trade flows. The $60 billion business focuses primarily on pipeline infrastructure for shuttling natural gas liquids (NGLs), crude oil, and natural gas across North America. That provides steady and predictable fee-based cash flow and supports a 6.1% distribution yield -- and surging domestic production is leading to truly amazing results.
In 2018, the business reported $4.2 billion of net income and $6 billion in distributable cash flow -- both records -- representing year-over-year growth of 47% and 33%, respectively. Companies as large as Enterprise Products Partners don't typically grow at that rate, but perhaps no other company is as well positioned to capitalize on growing demand for NGLs -- a class of petrochemicals largely overlooked by investors.
NGLs are by-products of oil and gas production. Because they're so bountiful and cheap, petrochemical manufacturers are racing to utilize them. In fact, close to $200 billion in investments have been announced for upgraded or new petrochemical facilities in the U.S., according to the American Chemistry Council. That will help the United States boast an expected trade surplus in chemicals of $71 billion by 2023.
Enterprise Products Partners will be the foundation for it all, transporting NGL feedstocks to facilities in dedicated pipelines, carrying refined products to market and export facilities, and storing excess product throughout its nationwide network. Simply put, this giant is only just beginning to awaken.
The future of mobile payments is already here
Chris Neiger (Square): Instead of riding the roller coaster of penny stocks with shaky business foundations, Square offers plenty of potential for share price gains and a solid market opportunity in the expanding contactless-payment space.
Square's point-of-sale terminals allow the company to collect a fee every time someone makes a payment through its devices (either using their phone or credit card). These transactions make up 74% of the company's total sales -- and business is booming. In the most recent quarter, total revenue jumped 51%, and the company's gross payment volume (GPV) -- the total dollar amount of processed payments through Square -- was up 29%. Even more impressive is the fact that the company just posted its first quarterly net profit in the most recent quarter.
But it's not satisfied with just collecting transaction fees; it's also expanding its reach with its Square Cash App and a potential move into banking. Square Cash App downloads outpaced PayPal's popular Venmo app in 2018 and in the first month of this year. That's no easy feat, and it shows just how competitive Square is as it takes on established players.
And the company has applied for a license that would allow it to lend money. If it gets approved, the company would be able to lend money directly to customers (it lends some money now, but only through a third-party bank) and open up an entirely new way to make money.
If you're chasing penny stocks for their potential for massive share-price gains, consider that Square has lots of upside as it continues to grow, but it comes with a stable business rooted in the expanding mobile payments market. The company's share price is up 744% over the past three years. And with contactless transactions expected to grow from $8.8 billion in 2017 to $27.2 billion in 2023, there's still plenty of runway left for Square.
A gold stock like none other
Neha Chamaria (Franco-Nevada): You might have heard time and again how precious metal stocks can help diversify your portfolio, but mining stocks aren't necessarily the only way to gain exposure to metals like gold. In fact, a gold streaming stock like Franco-Nevada has handily outperformed its mining peers over the years, and there's a fair chance it will continue to do so, making it one stock you'd want to pick over the lure of several mining penny stocks that could eventually burn your fingers.
Franco-Nevada shares have nearly quadrupled in the past 10 years, thanks primarily to its streaming business model. The company doesn't own and operate mines, but instead buys precious metals like gold from mining companies at discounted prices in return for funding them up front. It's a high-margin business, as Franco-Nevada doesn't have to bear mining-related costs and can also secure metals for low prices. In the past decade or so, the company has built a solid portfolio of streaming assets with leading mining companies and has even diversified into oil and gas royalties, adding another offbeat yet lucrative source of revenue to gain an edge over its streaming peers.
Between 2017 and 2022, Franco-Nevada expects to grow its gold-equivalent-ounce production by 17%, and oil and gas revenue by nearly 177%, to achieve at least 30% growth in EBITDA. The company looks well positioned to grow its cash flows in coming years and maintain its industry-leading dividend track record that boasts 11 consecutive years of annual dividend increases.
Steadily growing dividends add significant appeal to Franco-Nevada shares as dividends not only reflect the resilience of the company's underlying business model in a volatile industry, but also contribute substantially to investors' total returns from the stock in the long haul.
With Franco-Nevada's portfolio exhibiting strong growth options and management affirming its commitment to shareholders, you shouldn't regret having invested your hard-earned money in this stock when you look back some years from now.