If you have $500 to invest right now, then I recommend you invest it in the stock market. That may be shocking to read, considering as of this writing, the S&P 500 is down 28% since this year began -- and still falling fast. But as scary as it is, the stock market has fallen over 10% 37 other times in the last 70 years. And it comes back every time, meaning that buying during a correction can produce outsized long-term gains.
Where exactly to invest $500, however, depends. Here's a few scenarios that may apply to you.
This stock market crash has many people strolling Wall Street for the first time. But losing on your first investment can scare you from future investments. When picking winning stocks, it's important to consider that Motley Fool co-founder David Gardner encourages investors to try picking market-beating stocks just 60% of the time. Hey, nobody's perfect. But buying just one stock requires 100% accuracy, and will leave many first-time investors disillusioned upon failing.
But $500 isn't much portfolio-building firepower. Fortunately, many brokers now offer fractional shares -- allowing the investment of a dollar amount rather than buying whole shares. This allows new investors with limited capital to begin their investing journeys with a portfolio diversified in at least a couple top starter stocks.
In this current coronavirus market correction, might I suggest some starter stocks relatively insulated from health crises and with lots of cash on the balance sheet. Both social-media empire Facebook (META 7.19%) and law enforcement technology company Axon Enterprise (AXON 5.64%) fit that description.
Facebook, has certain advantages during a time like the COVID-19 pandemic. It's relatively easy for its employees to work from home, as many are already doing. Furthermore, its primary products (Facebook, Instagram, Whatsapp) are digital social platforms not in danger of coronavirus contamination, so the doors won't close like a retail business.
Facebook's stock has dropped with the market, bringing it down to relatively low valuation multiples. And beyond the company's core advertising revenue, it has future opportunities for growth in virtual reality, the monetization of Whatsapp, and payment processing. And its pristine balance sheet allows it to pursue these ventures even in a recession. The company ended 2019 with $55 billion in cash and no long-term debt.
Axon keeps chugging along
Likewise, Axon Enterprise is relatively unaffected by the COVID-19 pandemic. In a recent statement the company said it's still manufacturing and shipping its physical products -- non-lethal weapons and body cameras -- on schedule. It also has subscription software products and is now generating $161 million in annual recurring revenue. And because its customer base is comprised of law enforcement agencies, a fairly non-cyclical customer, it's less likely to see revenue suddenly fall off a cliff.
Turning to its balance sheet, Axon has $350 million in cash, cash equivalents, and short-term investments. And its long-term liabilities are only $11 million. That's a lot of equity for a company with only a $3.2 billion market capitalization. This cash-rich position, like Facebook, gives it the opportunity to continuing developing new products and services in 2020 -- including the $100 million it's investing this year in new officer-dispatch services.
Start a new position
Diversification is a good thing in a portfolio. If you're still building out your portfolio, a market crash like this can be good timing. For me personally, I used this market correction to initiate a position in Pinterest (PINS 7.89%).
My Pinterest investment thesis is fairly simple. It now has 335 million users, which was good for 26% annual growth in 2019. That gives Pinterest a massive audience, yet still a fraction of Facebook's more than 2 billion users. Improving average revenue per user (ARPU) fueled its 46% annual revenue gain. And the company stands to grow ARPU even further by teaching companies how to better use Pinterest to make their products more "shoppable" on the platform.
Pinterest isn't for everyone, I'll admit. The company reported a $1.4 billion net loss in 2019, due to high research & development and sales & marketing costs. However, that spending is coming down significantly -- the company "only" had a $36 million net loss in the fourth quarter. But thanks to its IPO, the company is still flush with $1.7 billion in cash and no debt.
The bottom line is if a company has been on your watch-list for a while, now could be a good time to buy. Nobody knows where the bottom is, so waiting for a better price might be fruitless.
Add to a winner
My longest holding, and most predictable, is Texas Roadhouse (TXRH 4.54%). Its consistent results have meant I've never fretted over my investment. Consider some stats over the last five years.
|Total unit growth*||7%||7%||6%||6%||5%|
|Net income growth||11%||19%||14%||20%||10%|
Granted, our world is currently facing an incredible economic challenge. For example, Booking Holdings owns OpenTable -- an online reservation company. As of this writing, OpenTable is showing a 56% decline in dine-in restaurant traffic. And traffic is still falling as quarantines, closings, and social distancing all increase. Texas Roadhouse has handled challenging times before, but restaurant traffic approaching zero is a scenario no one ever expected just two months ago.
To be sure, 2020 isn't going to be fun for restaurant stocks. Since Texas Roadhouse is a U.S. chain, this year completely depends on how quickly the U.S. can stop the spread of the coronavirus and diners return to normal routines. That's outside the company's control. But if you're an optimist, at some point normalcy will return, and Texas Roadhouse is one of the top restaurant companies to own.
I haven't added to my Texas Roadhouse position, although it's something I'm considering when the Motley Fool's trading rules allow. However, it's moments like this that one appreciates the notion of letting winners run. Although I've seen my portfolio's value sink as Texas Roadhouse's stock crashed, my position is still up because I've never sold and had a dividend reinvestment plan in place over the time I've held.