Please ensure Javascript is enabled for purposes of website accessibility

Don't Waste Your Money on Penny Stocks; These 3 Are Better Buys

By Prosper Junior Bakiny – May 28, 2020 at 8:46AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Unlike most penny stocks, these three companies are leaders in their respective industries and could provide market-beating returns for a while.

Putting your money in penny stocks can be tempting. After all, if shares of a company are going for a couple of bucks apiece, a relatively small investment could turn into a fortune if the company's stock rises significantly.

However, while some penny stocks are worth serious consideration, most of them are cheap for a reason, and investing in them can be highly speculative. Instead of gambling on the chance that you will hit the penny-stock jackpot, consider these three established companies sure to earn you solid returns for many years to come: Gilead Sciences (GILD 4.80%), Square (SQ 11.89%), and Visa (V 2.20%)

1. Gilead Sciences

There's been a lot of noise about Gilead Sciences lately due to its involvement in the fight against COVID-19. The company's antiviral drug, remdesivir -- which was perceived as one of the most promising potential treatments for the novel coronavirus -- received emergency-use authorization from the U.S. Food and Drug Administration (FDA) back on May 1. On May 7, remdesivir was approved for COVID-19 patients in Japan. But I think there are even better reasons than its involvement in the fight against COVID-19 to buy shares of this company.

Female doctor holding a piggy bank.

Image Source: Getty Images.

First, there's the company's filgotinib, a potential treatment for rheumatoid arthritis (RA) that Gilead submitted for approval in December.

While there are many other drugs for this disease, filgotinib could set itself apart for one major reason: According to Gilead, the majority of RA patients still suffer from "symptoms of inadequately controlled RA" despite the many treatment options available. Filgotinib has the potential to fill this unmet need in the RA market, and could become a blockbuster drug. The drug is also being investigated for other conditions, including Crohn's disease, psoriatic arthritis, and ulcerative colitis.

Second, Gilead Sciences remains a leader in the market for HIV drugs. During the first quarter, the company's HIV lineup performed well, with sales jumping by about 14% year over year to $4.1 billion. In particular, Gilead's Biktarvy recorded sales of approximately $1.7 billion during the first quarter, compared with just $793 million during the first quarter of the previous fiscal year. Biktarvy is now the No. 1 prescribed HIV treatment in the U.S.

Gilead's HIV lineup will likely continue to be a growth driver, and with other products ready to boost its top lineup even more, especially filgotinib, the company looks poised to continue performing well for a long time. In short, now is a good time to buy shares of this pharma company.

2. Square

Square has had a much better year than most other companies on the stock market. Year to date, shares of this tech company are up by about 30%, while the S&P 500 is down about 8%. However, the company's valuation metrics have also soared. Given this, why should investors buy shares of this company, especially considering it isn't even consistently profitable yet?

SQ Chart

SQ data by YCharts

For one, Square's core business remains highly successful. The company provides businesses -- mostly small and medium-sized ones -- with the convenient ability to turn almost any modern electronic device into a payment processor. But Square has progressed beyond this original appeal, using that core offering to offer more services to thousands of sellers, including inventory, payroll, and beyond.

Square's ecosystem of sellers is a major strength, and the company sees no end in sight to its growth. "We see significant opportunity to bring new sellers and individuals into our ecosystems and build and launch new products to serve them both today and long-term," Square CEO Jack Dorsey said.

Further, Square can count on Cash App, its peer-to-peer payment processing system, to serve as a growth driver as well. The company continues to attract more users to Cash App, noting that the application "added its largest number of net-new transacting active customers" during March.

While that was in part a result of a shift in consumer behavior due to the ongoing pandemic, Cash App has been performing well nonetheless, having expanded its customer base and revenue for a long time now. That's all thanks to the services the app offers, including direct deposit, a debit card available to Cash App users, and more.

Square's growth prospects aren't an immunity against short-term headwinds, and the company's stock could still take a beating this year as a result of the current economic uncertainty. But in the long run, those who buy shares of this tech company today and hold them will be glad they did. 

3. Visa

Visa's latest quarterly update -- which was for the second quarter of its fiscal year 2020 -- wasn't particularly pretty. The company said that the ongoing crisis had a negative effect on its underlying business drivers, particularly during March.

This is hardly surprising: Unemployment has soared as a result of the outbreak, and people have less money to spend. Visa's revenue largely depends on transactions and payment volumes, so the fact that the company's business isn't booming amid the pandemic should shock no one.

Even with these headwinds, though, Visa's stock has performed relatively well, up 1.6% since the beginning of the year. Most importantly, Visa's long-term prospects remain intact. As the war on cash intensifies and people increasingly ditch paper currency for alternative payment methods, Visa is in an excellent position to benefit.

The company's business model is a classic example of the network effect. The more consumers Visa can lure into its ecosystem, the more attractive it becomes to merchants, and the more merchants it attracts, the more consumers look to join the ecosystem. Competitive advantages including the network effect and Visa's highly recognizable brand name are the key to earning above-average returns in the long run. And while some will point at Visa's competitors, including Mastercard (MA 3.71%), there's more than enough space for multiple winners in this market. In short, despite the current challenging market conditions and the competition in its industry, Visa is an excellent stock to buy right now.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences, Mastercard, Square, and Visa and recommends the following options: short September 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$65.31 (4.80%) $2.99
Visa Inc. Stock Quote
Visa Inc.
$185.65 (2.20%) $4.00
Block, Inc. Stock Quote
Block, Inc.
$62.41 (11.89%) $6.63
Mastercard Incorporated Stock Quote
Mastercard Incorporated
$301.27 (3.71%) $10.79

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.