Whether you're a tenured investor or relatively new to the investment world, this has been a head-scratcher of a year. In roughly a four-month span, the benchmark S&P 500 has crammed in about 10 years' worth of volatility.
Following a 34% nosedive in the broad-based index over a matter of 33 calendar days, the S&P 500 spent the subsequent 11 weeks gaining most of its losses back. In fact, the technology-heavy Nasdaq Composite reached an all-time closing high above 10,000 this week. And all of this is happening with the U.S. unemployment rate at one of its highest readings in almost nine decades, due to the coronavirus disease 2019 (COVID-19) pandemic.
Millennial investors appear to be (wrongly) focused on the short term
The good news, if there's any to be pulled from the arrival of COVID-19, is that bouts of panic selling have always marked an excellent time to put money to work in the stock market. This is especially true for millennial investors (traditionally defined as persons born between 1981 and 1996), who happen to have time as their ally.
But not all millennials are investing with a long-term mindset. Though online investing app Robinhood has done an exceptionally good job of attracting millennial investors, many of them seem more inclined to chase today's "hot stock" rather than put their money to work in growth-oriented, time-tested businesses.
Admittedly, the trading activity lately has been highly abnormal. I can personally only recall one time in the past 20 years where penny stocks (those with very small market caps) have been so hot as a group. Unfortunately, this dart-throwing technique led to microcap traders getting burned the last time this happened -- and I suspect it'll eventually be the same this time around. After all, most microcap companies have minuscule valuations for a reason.
If millennial investors really want to get rich, here are three great companies they should be buying.
Since millennials are the first truly technology-focused generation, it only makes sense for them to consider buying into a high-growth social media company like Pinterest (PINS -1.27%). To be frank, I believe Facebook would be another fine choice, but buying into Pinterest now is like buying into the Facebook growth story in the early innings.
What makes Pinterest such an intriguing company is its ability to attract new users in international markets. Over the trailing five quarters, Pinterest's monthly active user (MAU) count has increased by 102 million to 367 million MAUs. The vast majority of these gains (around 90%) are from overseas markets.
Although average revenue per user (ARPU) is much higher for U.S. MAUs, there's considerably juicier ARPU growth potential from overseas markets. As long as Pinterest can continue growing its user count by a double-digit percentage, it'll have little issue growing its ad-pricing power.
Pinterest should also benefit from its still-nascent e-commerce opportunity. Considering that users are utilizing the platform to share their interests, it only makes sense for Pinterest to further monetize the platform by allowing small and medium-sized businesses to set up marketplaces. If Pinterest can keep these consumers engaged and encourage them to follow through on their interests with actual product purchases, it could become an absolute social media juggernaut over the next decade.
Another smart way for millennials to put their money to work would be to consider the well-being of their four-legged friends. According to the American Pet Products Association in 2018, 73% of millennials owned a pet. And as virtually anyone who has a pet can tell you, your four-legged pal is part of your family. That's what makes Trupanion (TRUP -3.68%) such an attractive stock.
Trupanion provides insurance policies on companion animals, such as cats and dogs. What you might not realize is that only between 1% and 2% of North American companion pets are insured. That's a massive pool of prospective customers who, as noted, view their pet as family and would likely spend big bucks to ensure their well-being.
While it's certain that we're going to see an uptick in competition in the companion-animal insurance space, Trupanion has done an excellent job of hitting the ground running with its veterinary partnerships. The rapport that Trupanion was able to build early on with the veterinary community should give it a leg up on its peers.
Investors should also take note that a majority of Trupanion's business is subscription-based. Subscriptions tend to generate lots of highly predictable cash flow, which will play a key role in pushing the company toward recurring profitability.
Finally, millennial investors should cast aside penny stocks and consider buying into one of the largest publicly traded companies in the world, Amazon (AMZN -2.09%). Despite its more than $1.3 trillion market cap, Amazon looks to be well on its way to becoming the first $2 trillion publicly traded company.
Chances are that millennials are very familiar with Amazon's marketplace. The ordering convenience provided by Amazon has helped it secure somewhere around 40% of all U.S. e-commerce market share, depending on your preferred source. Also, with more than 150 million Prime members worldwide, Amazon is able to use the collected fees from these memberships to offset its thin retail margins.
While there's little question that Amazon will continue to dominate the online retail space, the long-term outlook for the company is dependent on the success of Amazon Web Services (AWS). AWS is the company's infrastructure-as-a-service cloud product that's currently growing at twice the rate of Amazon's retail operations. More importantly, the margins associated with AWS are significantly higher than what Amazon generates from retail and selling ad space. As AWS grows into a larger percentage of total sales, Wall Street foresees Amazon's operating cash flow per share nearly tripling between 2019 and 2023 to north of $200.
In other words, Amazon still has plenty left in the tank for millennial investors.