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3 Great Stocks for Your IRA

By Nicholas Rossolillo - Updated May 22, 2020 at 8:18AM

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Making the deposit into an Individual Retirement Account is only half the battle.

So, you've done yourself a favor and deposited money into your IRA.

That maximum $5,500 contribution for 2019 and $6,000 for 2020 -- plus an extra $1,000 if you're over age 50 -- is a big deal. Whether it was for the tax deduction and deferred taxable gains of a traditional IRA or the future tax-free gains of a Roth IRA (after you wait five years and reach age 59 and a half, of course), that contribution will yield rich rewards down the road.

Deciding to forego cash-in-hand now and making a deposit is one thing, but you still have to decide on where to invest. For my deposits, I favor growth stocks with a long runway ahead of them and little to no need for "babysitting." Three options that could be great for your IRA are (CRM 0.31%), Visa (V 0.29%), and Alibaba (BABA -0.84%). Let's take a closer look and see why they work so well for an Individual Retirement Account.

Glass jars filled with coins.

Image source: Getty Images.

1. Salesforce: A digital transformation machine

For years now, cloud computing has been picking up steam and fueling "digital transformation" -- a catch-all phrase for organizations looking to update their operations for the 21st century. Along with fellow software giant Adobe, Salesforce has become the leader in the digital transformation charge.

Long a champion of cloud computing, Salesforce has become an agent for positive organizational change by focusing on services that help a business put customers first. It started with relationship management software, which still makes up the core of Salesforce's revenue. But via internal development and a steady string of acquisitions over the years, the cloud service giant has added marketing, commerce management, and data integration tools to its portfolio as well.  

The result is a massive enterprise that is still growing revenue well north of 20% a year as cloud-based digital transformation is in high demand. A big test for Salesforce will come during its first-quarter report, which will include the front end of the coronavirus crisis, due out on May 28. But even should the company stumble this year, I'd expect it to be temporary. With social distancing likely to linger for some time and the work-from-home trend picking up steam, digital tools are going to be more crucial than ever in the decade ahead. And to bridge any troubled waters, there was $7.95 billion in cash and equivalents and only $2.67 billion in debt on the books at the end of January 2020.

The company's aggressive expansion via acquisition doesn't sit well with all investors, but Salesforce knows how to convert revenue into profitability. Revenue over the last decade is up 694%, but free cash flow (what's left after cash operating and capital expenses are paid) per share is up 1,070%. The stock doesn't come cheap at 40 times trailing-12-month free cash flow, but long-term growth stories with plenty left in the tank usually carry a premium for a reason.  

2. Visa: A digital payments and fintech all-in-one

Speaking of stocks that still carry hefty premiums, even after the coronavirus market meltdown and ensuing rally, Visa currently trades for 35.7 times trailing-12-month free cash flow. The reason? Though revenue is going to take a hit for at least a quarter or two with in-person credit and debit card use down by double-digit percentages, Visa's results in the first two months of 2020 before the wheels started coming off the economic wagon were impressive.

Revenue for Q1 was up 7% year over year. Low-teens percentage increases in transactions processed during January and February were offset by sudden declines in March when shelter-in-place orders took effect. It's going to take time for Visa to rebound, but the first two months of the year underscore the fact that the war on cash is still a high-growth industry that has plenty of opportunity left ahead of it.  

Top-line expansion is good, but Visa's profit margins are truly a sight to behold. Even with expenses mounting and sales cratering by the end of its last quarter, adjusted net profit margins came in at a whopping 52.5%. And over the last 12 months, Visa generated $11.9 billion in free cash flow. Those huge margins are getting put to work via share repurchases (which boosts profit per share), as well as ongoing investment into fintech. Data security services have been one area of focus for Visa and rival Mastercard in recent years, but the latest $5.3 billion takeover of financial account aggregator Plaid in January signals the company is ready to flex its muscles outside of its digital transaction bread and butter.

Other areas of focus in a post-coronavirus world will be contactless payment terminals and e-commerce, and Visa has the ammunition to easily take on those competitive markets. In addition to its enviable cash-generating engine, cash and equivalents on the books at the end of March 2020 was $13.2 billion, and long-term debt was $13.9 billion. There's a reason this was one of the best financial technology stocks of the 2010s. I expect the next decade to be much of the same.  

3. Alibaba: E-commerce for the world's largest population

Alibaba is another high-growth mega-tech firm, focusing on all things digital commerce in China. Despite its sprawling size, revenue jumped 38% higher in the final quarter of 2019, and adjusted earnings per share increased by 49%. Free cash flow was 31% higher in 2019 and was $28.7 billion on total revenue of $70.6 billion. Not too shabby.

However, while its big-tech peers carry hefty premiums, Alibaba stock currently only trades for 20 times trailing free cash flow -- both a value for the growth and a relative value to its peers. What gives?

For one, new proposed legislation from the U.S. Senate would remove foreign companies from U.S. stock exchanges if they are unwilling to submit to audits and unable to certify they aren't controlled in some way by a government. What that means for Alibaba should the legislation get signed into law remains to be seen. 

Another risk is that it still remains to be seen how the lockdown on the Chinese economy to keep COVID-19 in check will affect Alibaba's trajectory. The company did say it was seeing growth in delivery and online retail sales, but travel spending on its platform took a big hit. Its advertising and fintech divisions could also weigh it down. And the same goes for its cloud computing segment as some customers were reportedly pausing on new projects to conserve funds during the downturn.  

As far as the pandemic goes, Alibaba has been in this position before. SARS in the early 2000s led to similar economic disruption, but ultimately that was followed by a boom in digitally based commerce. Something similar could ensue once the dust settles with COVID-19. Plus, Alibaba is also a play on the still-developing Chinese middle class. This tech giant stock is a value for the long-term potential that comes with it.

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Stocks Mentioned

Salesforce, Inc. Stock Quote
Salesforce, Inc.
$172.73 (0.31%) $0.53
Visa Inc. Stock Quote
Visa Inc.
$201.12 (0.29%) $0.58
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
$119.12 (-0.84%) $-1.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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