For more than four months, investors have been taken on one heck of a roller-coaster ride. In a span of less than five weeks between February 19 and March 23, the broad-based S&P 500 entered bear market territory and ultimately lost as much as 34% of its value. Then, in the 11 weeks that followed, the benchmark index would reclaim more than 80% of its losses. This whipsaw in the S&P 500 represented about a decade's worth of volatility crammed into a four-month time frame.
While it's undoubtedly been an emotional and trying time for short-term traders, bouts of panic-selling have historically always been good news for long-term investors. Even though emotions can drive short-term stock moves, operational earnings growth from great companies tends to drive long-term share-price appreciation.
With the S&P 500 still down for the year and the CBOE Volatility Index considerably higher than its historic average, there's plenty of opportunity for investors to put their money to work. Best of all, you don't need to be rich to make bank in the stock market. If you have, say, $3,000, in disposable cash that won't be needed for bills or emergencies, you have more-than-enough money to buy into some of the best stocks the market has to offer.
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Intuitive Surgical
One of the smartest companies long-term investors can consider buying is surgical-system developer Intuitive Surgical (ISRG 1.62%). Though most medical-device makers have struggled with competition and commoditization, Intuitive Surgical has run away from the field with its assistive da Vinci surgical system.
Over approximately 20 years, Intuitive Surgical has installed 5,669 of its da Vinci systems. That's far more than any of its peers on a combined basis. Having such incredible market share has allowed the company to build rapport with the medical community, as well as ensure that virtually none of its clients leaves for a competitor. When a client turns to Intuitive Surgical for the company's soft-tissue surgical solutions, it's liable to remain a customer for a very long time.
Intuitive Surgical also benefits from its razor-and-blades business model. Just as personal-care companies sell people a cheap razor but make lots of money by selling high-margin blades with each use, Intuitive Surgical has a means of "hooking" its clients and generating juicier margins over time.
For Intuitive, its da Vinci system is the razor. Although these systems are pricey, they're also costly to build, and therefore lead to only mediocre margins. The high-margin sales channels (i.e., blades) for the company are derived from the instruments sold with each procedure, as well as from servicing the da Vinci system. As the number of da Vinci systems installed worldwide increases, Intuitive Surgical will see its operating margins expand. That's why this company looks like a surefire winner in the healthcare space.
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Palo Alto Networks
Another wise way to put $3,000 to work would be to invest it in cybersecurity giant Palo Alto Networks (PANW +0.16%).
Cybersecurity was already a hot topic long before the coronavirus disease 2019 (COVID-19) pandemic hit. However, COVID-19 is poised to disrupt how businesses will operate for the foreseeable future. As the workplace shifts from an office setting to remote locations, including workers' homes, the need for reliable security solutions to protect enterprise clouds has become more imperative than ever. That makes cybersecurity perhaps the most important beneficiary of this difficult situation.
What makes Palo Alto such a winner is two factors. First, we have a company that's making the smart choice to move away from commoditized firewall products and toward subscription-based cybersecurity solutions. As you can imagine, physical firewall product revenue can be lumpy, and the margins somewhat unpredictable. Meanwhile, subscription and service revenue leads to much higher margins and more cash flow consistency. Based on Palo Alto's most recent quarter, subscription revenue now accounts for 68% of total revenue, up 6 percentage points from the prior-year quarter.
Second, Palo Alto's management team is willing to make short-term sacrifices for long-term market-share gain. The company has freely claimed that it will invest aggressively in cloud-based security innovation, and it's not been shy about making add-on acquisitions to further enhance its ability to protect enterprise clouds. Any near-term weakness in Palo Alto should be viewed as a golden opportunity to buy into this top-tier cybersecurity company.
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Bank of America
Investors would also be smart to keep their eyes peeled for brand-name stocks trading at a discount. One such name that comes to mind is money-center giant, Bank of America (BAC +1.38%).
When buying mature bank stocks, investors should understand that these banks are not immune to recessions. They're also not going to magically double overnight. What you're getting with a brand-name stock like Bank of America is money-making consistency. Because the U.S. economy expands for considerably lengthier periods of time than it contracts, and banks are cyclical, BofA spends far more time growing its business than playing defense, so to speak.
Over the past decade, we've witnessed a new Bank of America emerge. The company has substantially better liquidity following the financial crisis, and it's worked hard to reduce its noninterest expenses over the past decade. In particular, BofA has been pushing consumers toward digital banking and mobile apps, both of which are significantly cheaper on a per-transaction basis than an in-branch transaction. During the COVID-19-impacted first quarter, Bank of America noted that a third of all consumer banking sales occurred in digital channels. This digital push has allowed BofA to close some of its physical branches.
Additionally, don't overlook Bank of America's willingness to aggressively reward shareholders when times are good. In June 2018, BofA introduced a $26 billion capital-return plan (this includes dividends and share buybacks), which was followed in June 2019 by an even more ambitious $37 billion capital-return plan. Although share buybacks have been halted because of COVID-19, CEO Brian Moynihan has made it clear that periods of robust economic expansion can pay off big time for shareholders.
Currently valued at only 93% of its book value, BofA looks like a serious bargain.
