When the curtain falls on 2020, it'll go down as one of the most volatile years on record. During the first quarter, we watched as uncertainty surrounding the coronavirus pandemic pushed the CBOE Volatility Index to its highest reading in history. We also saw a ferocious rally from the March 23 bear market low.
Generally speaking, when volatility soars, young and/or novice investors take it as their cue to pile into the stock market.
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Online investing app Robinhood, which is known best for its commission-free trading, gifting of free shares of stock to new members, and fractional-share investing, has seen its membership skyrocket in 2020. That's because Robinhood is a popular destination of millennial and novice investors, with the average age of its members being only 31.
On the bright side, young investors putting their money to work in the stock market should be commended. With time as their ally, they have the leverage to compound their initial investment many times over before and after retirement.
But at the same time, Robinhood has done a poor job of prepping its users for success. Without the proper tools and education, many of its members are focused on penny stocks or downright awful companies, rather than putting their money to work over the long run in potentially game-changing businesses.
If Robinhood investors want to get rich the right way, here are four smart stocks they can buy right now and hang on to for many years to come.
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Datadog
One company that looks like a no-brainer buy for investors with a long horizon is cloud-based software-as-a-service provider Datadog (DDOG 4.56%). With COVID-19 completely disrupting the traditional office environment, anything and everything having to do with cloud-based data, including monitoring, has come into focus. Long after the pandemic has passed (whenever that may be), Datadog's application performance monitoring solutions, especially for consumer-facing businesses, will remain in high demand.
Just how impressive has Datadog been? In the second quarter, the U.S. economy saw its biggest decline in gross domestic product in decades. Comparatively, Datadog delivered sales growth of 68% from the prior-year period, along with another quarter of adjusted profits.
Perhaps most important, the company's growth was especially pronounced among bigger businesses. Datadog ended June with 1,015 subscribing customers with at least $100,000 in annual recurring revenue (ARR). That's up from 594 customers with an ARR over $100,000 in the prior-year period. Datadog's key to rapid margin growth is getting its existing clients to spend more, which is pretty clearly what we're seeing happen. Look for Datadog to double its sales a couple of times this decade.
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Innovative Industrial Properties
Since the Robinhood platform bars its members from buying over-the-counter-listed stocks, one of the few smart names Robinhood investors can buy in the marijuana space is Innovative Industrial Properties (IIPR 1.03%).
Innovative Industrial Properties is a real estate investment trust (REIT) that acquires and leases medical marijuana cultivation and processing sites in the United States. Through the beginning of October, IIP owned 63 properties in 16 states, and had more than 99% of its owned square footage leased for a weighted-average length of 16.2 years. Even though the company stopped reporting its average yield on invested assets in the first quarter, I suspect it'll take around six years for the company to recoup its invested assets, with everything afterward being gravy.
Innovative Industrial Properties has particularly benefited due to its sale-leaseback program. With access to financial institutions limited for U.S. marijuana stocks, IIP steps in to purchase properties for cash. In return, it immediately leases these assets back to the seller for an extended period of time. The operator receives much-needed cash, while IIP lands a longtime tenant.
With the U.S. being the No. 1 cannabis market in the world, the future remains bright for Innovative Industrial Properties.
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DexCom
Buying great stocks is sometimes as easy as playing a numbers game. That's why medical device company DexCom (DXCM -4.57%) has the opportunity to make patient Robinhood investors rich.
Specifically, DexCom is focused on developing and selling continuous glucose monitoring (CGM) systems for diabetics. Instead of patients regularly pricking their fingers to check their blood glucose levels, DexCom's CGMs provide pertinent data to the patient and/or physician via a wireless device. It can even be linked with certain insulin pumps to improve glycemic balance.
When I said that buying great stocks is sometimes as easy as playing a numbers game, I meant standing behind a company whose patient pool consists of 34.2 million diabetics in the U.S., and another 88 million U.S. adults with pre-diabetes. The number of Americans with this chronic illness has continued to climb over the decades, providing a growing pool of patients for an indication with no cure.
Furthermore, because the service DexCom provides is subscription-based, it reduces the likelihood of client churn and provides exceptionally high margins. DexCom isn't a fundamentally cheap stock, but its consistent double-digit growth rate makes it well worth the premium.
Image source: Sea Limited.
Sea Limited
A final smart stock that has the potential to make Robinhood investors rich is Singapore-based Sea Limited (SE 0.91%).
Sea has had a monstrous run-up this year, but looks to be just clearing its throat in terms of long-term growth potential. Made of up three operating segments, Sea's gaming arena is responsible for the bulk of its sales -- for now. Sea's mobile hit game Free Fire saw its number of paying customers more than double in July 2020 from July 2019, with over 100 million daily peak active users. All told, 10% of quarterly active users (for the entire digital entertainment segment) are now paying customers.
But it's not gaming that has the investment community so excited. Sea Limited has the opportunity to become in Southeast Asia what MercadoLibre became in South America. Sea's Shopee e-commerce platform saw gross orders increase by 150% during the second quarter, with adjusted revenue nearly tripling. This is a region with a burgeoning middle class that, like the rest of the world, is seeking convenient consumption options during the pandemic. The online Shopee platform has been the prime beneficiary, and should continue to be so, well after the pandemic is over.
The feather in Sea's cap is that it's also disrupting traditional finance with its SeaMoney solutions. More than 15 million people are already paying mobile wallet customers.
Like Datadog, Sea should be capable of doubling its sales every three to four years.
