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Don't Waste Your Money on Penny Stocks: These 3 Stocks Are Better Buys

By Anders Bylund – Oct 15, 2020 at 8:19AM

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Here are three exciting growth stocks with large market caps and serious long-term business plans.

Penny stocks can be exciting, but they're also incredibly risky. A handful of small companies with stocks priced below $5 per share will hit the jackpot and skyrocket, but most of these lottery tickets are busts. Even when you do find a winning ticket, the gains are often short-lived, and the big wins on paper disappear in a hurry when you don't sell near the absolute peak. Market timing is a nearly impossible game, so penny-stock speculation is closer to gambling than to investing.

Yet there's no need to worry. It's actually easy to find well-respected companies with substantial market caps that are great buys right now. Forget about those tempting, yet dangerous penny stocks and consider three high-quality stocks instead: Roku (ROKU 9.58%), Telefonaktiebolaget LM Ericsson (ERIC 4.08%), and Coupa Software (COUP 2.90%).

Rolled-up dollar bills weighing against the word RISK on a seesaw-style balance board.

Image source: Getty Images.

The technology of tomorrow's entertainment

Roku makes devices and software that connect your living room TV to the ever-growing array of streaming video services. This is the big winner you're looking for in the media-streaming sector if you don't feel up to picking a winner among the dueling giants Netflix (NFLX 8.74%), Walt Disney (DIS 3.36%), and (AMZN 4.46%).

Don't get me wrong. I think there's plenty of room for several successful services in the streaming video market as digital entertainment becomes the gold standard for media delivery around the world. But one or more of them may stumble along the way, giving up ground to the teeming throng of competitors and losing some of their long-term value. Roku is the low-risk bet here since the company offers a service-agnostic set of streaming tools directly to consumers and makers of TV sets (or set-top boxes) willing to pay license fees for a proven solution.

Thanks to the exploding variety of streaming services and the coronavirus lockdowns in 2020, Roku's stock has doubled over the last 52 weeks. You can wait for a dip if you think this stock is too expensive right now, but I'd suggest at least getting started with a small position. You don't want to miss getting into this incredible growth stock in case the big dip never comes along.

A big bet on 5G

Telecom infrastructure specialist Ericsson is on the cusp of a global 5G rollout, starting in developed markets like the U.S. and Western Europe. Developing nations will follow suit in due time, though some are only getting started on 4G technologies now.

The company delivered its first commercial 5G station to American carriers in July and has continued to sign up more 5G clients since then. We're watching the early days of a massive growth market here, and Ericsson is one of just a few significant equipment providers. The global market for 5G infrastructure equipment and services was just $371 million in 2017 and is projected to skyrocket into an annual revenue pie of $58 billion by 2025, according to industry analyst firm Valuates.

Ericsson is trading more than 10% below its annual highs today, having gained just 22% in 2020. If Roku's valuation is too rich for your blood, the Swedish telecom equipment expert gives you a more affordable entry point into another explosive growth market.

An office worker looks shocked while staring at his laptop screen.

Image source: Getty Images.

An underestimated market leader

Enterprise software veteran Coupa Software's stock fell 16% in September, opening up a fantastic buying window for venturesome investors. The window is about to close since Coupa's stock has been climbing back in October, but it's not too late to pick up another marvelous growth stock in the middle of a long-lasting bull run.

Coupa provides business spend management tools to businesses of every size, exploring a massive addressable market with very few head-to-head competitors. The company is building artificial intelligence functions into its spending analysis software, providing many unique functions that its larger rivals can't match.

Many of Coupa's clients say that this software gives them a competitive advantage with direct effects on their top and bottom lines. I don't know about you, but that sounds like a winning business plan to me. Coupa backs that idea up with compound average revenue growth of 50% over the last five years.

All three of these stocks are great examples of high-octane growth stocks married to market caps of at least $20 billion. You don't have to bet on questionable penny stocks with flimsy financial foundations in order to reap impressive returns in the long run. And you won't lose any sleep over these winners along the way, either.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon, Netflix, Roku, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Netflix, Roku, and Walt Disney. The Motley Fool owns shares of Coupa Software and recommends the following options: long January 2021 $60 calls on Walt Disney, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Telefonaktiebolaget LM Ericsson Stock Quote
Telefonaktiebolaget LM Ericsson
$6.37 (4.08%) $0.25
Coupa Software Stock Quote
Coupa Software
$63.24 (2.90%) $1.78
Roku Stock Quote
$59.37 (9.58%) $5.19
Walt Disney Stock Quote
Walt Disney
$97.87 (3.36%) $3.18
Netflix Stock Quote
$305.53 (8.74%) $24.57 Stock Quote
$96.54 (4.46%) $4.12

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

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