This may well go down as the wildest year on record for the stock market. The uncertainty and panic caused by the coronavirus disease 2019 (COVID-19) pandemic torpedoed equities during the first quarter, then saw them rally ferociously in the second quarter. Frankly, no one has a clue what's going to happen in the very near term.
While volatility is often a great thing for long-term investors, given that it allows for the purchase of great stocks at a discount, it has a bit of a dark side, too.
You see, over the past couple of months we've witnessed the rise of the "Robinhood investor."
Robinhood is an online investing platform that's been particularly adept at attracting millennial and/or novice investors. There's absolutely nothing wrong with encouraging younger investors to get involved in the stock market. In fact, it's a fantastic thing considering that the earlier people start investing for their future, the greater chance they have of securing their financial freedom.
However, Robinhood hasn't given its young and/or novice investors the tools they need to succeed. As a result, it's given rise to an army of day-traders and risk-takers who only seem to care about penny stocks and what's hot right now.
Though much of Robinhood's leaderboard (i.e., a ranking of the most-held stocks on the platform) reads like a what-to-avoid list, there are a few gems mixed in. If you're looking for a great place to park your money for the years to come, consider buying the following three popular Robinhood stocks -- because if you don't, you'll probably regret it.
One Robinhood stock you'll be kicking yourself for not buying is payment facilitator Visa (V 2.20%). Since the year began, the number of Robinhood members holding Visa in their accounts has more than doubled to approximately 98,400, as of this past weekend.
Though there's no question that Visa is going to face an uphill battle for a couple of quarters as the U.S. and global economy navigate through a COVID-19-induced recession, Visa has shown that it's more than capable of delivering superior returns to its shareholders more years than not.
A big key to Visa's success is its dominant market share in the United States. Between 2008 and 2018, Visa expanded its share of credit card-based network purchase volume in the U.S. from 42% to 53%. That's a highly enviable positon to be in for an economy that counts on consumption for approximately 70% of gross domestic product. As the clear cashless choice among merchants in the U.S., Visa has had little trouble growing its bottom line by a double-digit percentage each year.
But Visa is also looking overseas for opportunities. In 2016, it acquired Visa Europe and gave its global merchant network a big boost. It also has plenty of opportunity to expand its payment infrastructure into Africa and the Middle East to continue growing its business by double digits.
Best of all, this is a company that's solely focused on the payment side of the equation. Since Visa doesn't directly lend money, it's not affected nearly as much when loan delinquencies begin to rise. This is a big reason its profit margin is usually above 50%.
Another great stock you're going to regret not buying that's become especially popular with Robinhood investors is Alphabet (GOOGL 3.04%) (GOOG 3.13%), the parent company behind internet search engine Google and streaming platform YouTube. Ownership in the Class A shares (GOOGL) has more than tripled in 2020 to nearly 107,000 Robinhood accounts.
Similar to Visa, Alphabet isn't impervious to some near-term coronavirus-related struggles. In fact, the advertising kingpin reported its first year-on-year sales decline (in Q2 2020) since going public back in 2004. When a recession strikes, it's not uncommon to see businesses scale back their advertising spend to conserve money.
But let's face the facts here: No search platform is more popular on the planet than Google. GlobalStats indicates that Google was responsible for between 92% and 93% of all internet search worldwide over the trailing 12-month period. That's an insane amount of eyeballs that businesses can potentially reach by using Google's targeted advertising.
In addition, it's important to put economic growth into perspective. Even though economic contractions and recessions are inevitable, the U.S. and global economy spend much longer periods of time expanding than they do contracting. This simply means that the ad market spends most of its time expanding. That bodes well for Alphabet's long-term margins, especially if traffic acquisition costs stabilize or decline over time.
One last note would be to not overlook Google Cloud. YouTube's viewership rightly gets a lot of attention, but Google Cloud delivered 43% year-over-year growth in the June-ended quarter, with the segment topping $3 billion in quarterly sales for the first time ever. Cloud revenue delivers considerably better margins than ad-based revenue, which suggests a significant uptick in Alphabet's cash flow may be on the horizon.
Investors are also likely to regret not buying into conglomerate Berkshire Hathaway (BRK.A 2.63%) (BRK.B 2.82%). Over the trailing six-month period, Berkshire Hathaway's popularity has soared on Robinhood from fewer than 39,000 members holding its stock to more than 100,100, as of this past weekend.
If you're wondering "Why Berkshire Hathaway," look no further than its CEO, Warren Buffett. The Oracle of Omaha's track record pretty much speaks for itself: A 20.3% compound annual return rate for Berkshire Hathaway's stock over the past 55 years. In other words, a $100 investment 55 years ago would have been worth over $2.7 million by Dec. 31, 2019. Returns do a lot of talking on Wall Street, and Buffett's knack for picking out businesses with sustainable competitive advantages is virtually unmatched.
Investors are also big fans of Berkshire Hathaway because of its tie-ins to the U.S. and global economy. The vast majority of Buffett's investment capital is tied up in information technology, bank stocks, and consumer staples, all of which are cyclical sectors or industries. Buffett has long-professed that investors not bet against America. Berkshire Hathaway's portfolio is a testament to that thesis. And, as noted, periods of U.S. economy expansion tend to last significantly longer than periods of contraction or recession.
Berkshire Hathaway has also been historically cheap throughout much of 2020. The last time Buffett's company was consistently valued at less than 30% above its book value was 2012. As a result of this valuation decline, Buffett and his right-hand man Charlie Munger have OK'd aggressive share repurchases. Through the first six months of 2020, Buffett has already repurchased $6.8 billion worth of Berkshire Hathaway's common stock.
History has shown that it's never been a bad idea to ride Buffett's coattails to big gains.