While the major indexes are still mixed, the stock market is well on its way to shaking off the unrivaled decline that happened between February and March. After shedding about one-third of their value, the Dow Jones Industrial Average and the S&P 500 are sitting a little below breakeven for the year, down 9% and 3%, respectively. At the same time, the tech-heavy NASDAQ is up an impressive 15% year to date.
Many investors have largely moved beyond the bargain-hunting that was so widespread just a few months ago and are now looking for other measures that might signal long-term success. A great place to start is finding businesses that have a market-leading position or strong tailwinds that can fuel ongoing growth.
If you have $3,000 (or less) in disposable cash that you don't need for immediate expenses or to beef up your emergency fund, putting it to work in these three top stocks could provide a windfall in the coming decade.
Square: Empowering the lifeblood of the economy
According to the U.S. Small Business Administration (SBA), small businesses are the lifeblood of the U.S. economy, creating nearly two-thirds of all new jobs and accounting for 44% of the economic activity in the country. One company uniquely positioned to benefit from that paradigm is Square (NYSE:SQ).
Square provides all the tools entrepreneurs need to get a business up and running. In addition to its namesake mobile point-of-sale payment devices, the company offers e-commerce, social media integration, and invoicing and billing tools. Square also offers a variety of delivery, pickup, and shipping options. Providing options like online retail and curbside delivery has helped many businesses survive and even thrive during the pandemic, helping fuel Square's growth.
While some investors feared the worst, Square delivered revenue growth of 44% year over year in the first quarter. The company continued to generate losses as it worked to seize market share, but Square's adjusted EBITDA improved by 85%. The company also processed gross payment volume of nearly $26 billion, which shows the staggering reach of its business.
Its Cash App is also driving growth. During the month of March, and then again in April, the peer-to-peer payment system added a record number of active customers, as the shelter-in-place orders caused "significant shifts in consumer behavior." As a result, gross profits from Cash App climbed 115% year over year.
Square is by no means cheap. After gaining more than 100% so far in 2020, investors have been willing to pay a premium for the fintech company's incredible growth opportunities, driving its forward price-to-sales ratio to 12 -- when a ratio of between one and two is considered good. I would argue that it's a small price to pay since analysts are forecasting that Square's revenue will more than double this year.
Roku: The under-the-radar streaming leader
There's little doubt that streaming has entered the mainstream, as the number of streaming video subscribers has surpassed cable customers in recent years. At the same time, cord-cutting is accelerating, with 4.9 million customers ditching cable in 2019, the largest single-year decline in industry history. Yet as the number of paid subscriptions has grown, TV enthusiasts are looking for an inexpensive way to fill the gaps in their viewing choices. That's where Roku (NASDAQ:ROKU) comes in.
The company pioneered the set-top boxes and dongles that are now staples in streaming video entertainment, but Roku also has a secret weapon in the streaming wars. It developed a dedicated operating system (OS) for smart TVs that it licenses to television manufacturers, eliminating the need for the additional equipment and improving the user experience. The Roku OS has become the industry standard and was embedded in one in three connected TVs sold in the U.S. last year, as well as 25% of sets sold in Canada. Roku is now expanding its reach into more international markets.
What investors may not realize is that the lion's share of Roku's revenue -- 73% in the first quarter -- came not from the sale of devices, but its platform segment, which includes advertising, The Roku Channel, and its OS licensing. This segment grew 73% year over year, accelerating from 71% growth in the fourth quarter. At the same time, active accounts climbed 37% and streaming hours jumped 49%.
Fear about a potential slowdown in advertising spending resulting from the pandemic has weighed on the streaming technology stock, giving long-term investors an opportunity to capitalize on this short-term thinking. The stock still isn't cheap, with a forward price-to-sales of 12. Still, analysts are predicting revenue will jump 32% this year and 35% in 2021 -- and Roku frequently exceeds expectations, which more than explains the premium pricing.
Livongo Health: Improving the quality of life for those with chronic conditions
One of the byproducts of the pandemic has been the accelerated adoption of telehealth as a way to keep patients connected with their health practitioners, particularly in the age of social distancing.
Livongo Health (NASDAQ:LVGO), while not strictly a telehealth company, brings similar technology to the table. It helps patients with chronic health issues better manage their conditions with the aid of connected devices. Livongo gathers and analyzes patient data and vital statistics with the help of artificial intelligence. Once the algorithms have done their thing, users receive customized feedback, coaching, and tips. By motivating them to make incremental behavioral changes, Livongo helps patients live longer, healthier lives.
While the company initially focused solely on patients with diabetes, it has since expanded its offerings and now includes such diverse conditions as weight management, diabetes prevention, hypertension, and behavioral health issues -- including depression and anxiety.
Livongo announced the preliminary results for its second quarter, which sent the stock soaring anew. For the second quarter, the company now expects revenue growth of about 111% year over year, after delivering 156% growth this time last year. While we don't yet have the full picture for Q2, the company hasn't been consistently profitable, though its recent losses have been small and manageable.
It's estimated that 60% of U.S. adults suffer from at least one chronic health condition, while 42% deal with more than one. Livongo's management estimates that the markets for diabetes and hypertension alone represent a nearly $47 billion market. With revenue of just $170 million last year, the company has barely scratched the surface of a massive opportunity.
It's worth noting that Livongo has the loftiest valuation of the bunch, with a forward price-to-sales of 30. In the context of the company's triple-digit year-over-year revenue growth, however, it doesn't seem nearly so expensive.