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3 Great Stocks Robinhood Investors Aren't Buying -- but Should Be

By Matthew Frankel, CFP® – Updated Jul 16, 2020 at 11:37AM

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Investors on the popular trading app are ignoring these excellent stocks.

No-fee stock investing platform Robinhood has exploded in popularity in recent years. There are now more than 13 million users taking advantage of zero-commission stock and option trades, the ability to purchase fractional shares of stock, and Robinhood's easy-to-use platform.

Robinhood publishes its users' most widely held stock holdings, and while some names toward the top of the list are excellent companies to buy over the long term, there's an alarming number of speculative stocks and beaten-down industries like airlines and cruise lines represented on the top 100 list. And there are some great stocks that are nowhere to be found on Robinhood's popular stocks list that belong on the radar of long-term investors.

With that in mind, three stocks that are not among Robinhood investors' top 100 holdings are Markel (MKL 2.06%), Digital Realty Trust (DLR -0.92%), and Goldman Sachs (GS -1.34%). I've put my own money into all three of these, so here's a bit about each one and why investors on Robinhood's innovative trading platform should take a closer look.

Person using smartphone.

Image source: Getty Images.

1. Markel

Many analysts have compared Markel to an earlier-stage Berkshire Hathaway (BRK.A -2.08%) (BRK.B -2.18%), and it's easy to see why. An insurance company at heart, Markel uses some of its paid-in insurance premiums, or "float," to invest in a large portfolio of common stocks, and also acquires entire businesses through its Markel Ventures division.

Markel's insurance focus is on specialty insurance products, also known as the excess and surplus or "E&S" lines. If you own a high-risk business and need liability insurance, or need to insure a special event, these are examples of what Markel does. The company also has a large reinsurance operation, which is essentially insurance for other insurance companies – for example, a company that sells homeowners insurance in coastal areas might purchase a reinsurance policy to limit their losses in the event of a particularly bad hurricane season.

The bottom line is that Markel is essentially using the same business model that has allowed Berkshire to handily beat the market over the past half-century. Specialty insurance can be a highly profitable business and investing in stocks and other businesses can supercharge this profitability. But at roughly 3% of Berkshire's size, this is a much smaller version that has tons of long-term growth potential. Markel isn't going to double or triple your money overnight but should produce strong and steady returns for decades to come.

2. Digital Realty Trust

Digital Realty Trust is a combination of a real estate company and a high-growth tech stock all in one. The company is a real estate investment trust, or REIT, that owns and operates a large portfolio of data centers around the world.

If you aren't familiar with the concept, a data center is a facility designed to house servers and other networking equipment in a secure and reliable environment. When you access a cloud-based application, store a file to your Google Drive, or upload photos to your social media, those things have to physically live somewhere -- and that's where data centers come in.

Demand for data centers is almost certain to rise in the years ahead. The number of internet-connected devices, including many types that transmit tons of data like autonomous vehicles and augmented reality devices, are expected to grow exponentially over the next few years, and the wide-scale rollout of 5G technology will dramatically increase the volume of data. And, the COVID-19 pandemic could end up being yet another tailwind if the work-from-home trend lasts.

3. Goldman Sachs

The financial sector has been one of the hardest-hit parts of the market in 2020, and it's easy to understand why. Record low interest rates haven't exactly created an optimal environment for bank profitability, and the double-digit unemployment rate could end up causing a spike in loan defaults, especially after government support expires.

However, the depressed valuations in the financial sector could be a buying opportunity, and Goldman Sachs could be an excellent way to invest. For one thing, since it is primarily an investment bank, Goldman isn't in the same situation as other big bank stocks. Specifically, several aspects of investment banking, such as debt underwriting and trading (Goldman's largest revenue source) often to do better during turbulent times.

For the time being, Goldman's exposure to consumer banking is rather small, but the bank is aggressively trying to expand its reach. So far, Goldman has done a fantastic job of growing its Marcus savings and lending platform, and it's tough to imagine a better way to enter the credit card business than partnering with Apple (NASDAQ: AAPL). This could just be the starting point, as Goldman has mentioned future products like checking accounts, an investment platform, and more. And without a branch infrastructure to pay for, Goldman has a major cost advantage over peers.

The right way to use Robinhood

Robinhood has been in the news quite a bit lately, and not for great reason. Many of Robinhood's customers are essentially using the platform to bet on short-term movements in stock prices, but the reality is that many investors are using Robinhood the right way -- to gradually build a portfolio of top-quality stocks to hold for the long run. And these are three great stocks that could help investors do just that.

Matthew Frankel, CFP owns shares of Apple, Berkshire Hathaway (B shares), Digital Realty Trust, Goldman Sachs, and Markel and has the following options: short October 2020 $800 puts on Markel and long October 2020 $750 puts on Markel. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Digital Realty Trust, and Markel and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$300.59 (-1.34%) $-4.08
Markel Corporation Stock Quote
Markel Corporation
MKL
$1,167.57 (2.06%) $23.56
Digital Realty Trust, Inc. Stock Quote
Digital Realty Trust, Inc.
DLR
$93.53 (-0.92%) $0.87
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$407,641.00 (-2.08%) $-8,659.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$270.29 (-2.18%) $-6.02

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

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