Whether you've been investing for five months or 50 years, 2020 has been challenging. Though volatility is always present in the stock market, equities have been dialing up whiplash for investors on a near-monthly basis since February. It's certainly tested the resolve of long-term investors.
This wild volatility has also lured millions of millennial and novice investors into the stock market in hopes of getting rich quickly. If you don't believe me, take a closer look at the membership figures for online investing app Robinhood.
Robinhood, which is best known for giving free shares of stock to new members, offering fractional-share investing, and allowing commission-free trades on major U.S. exchanges, has seen its member count increase by the millions. The average age of the typical Robinhood user is only 31.
On one side of the coin, it's fantastic to see younger investors putting their money to work in the stock market. There simply hasn't been a greater wealth creator over the long run.
On the flip side, Robinhood hasn't done a great job of giving its members the tools or knowledge needed to understand the power of compounding or long-term investing. Robinhood investors thus often chase awful companies and focus on the short term.
Thankfully some members are getting the message. Robinhood's leaderboard (i.e., the 100 most held stocks on the platform) holds three absolutely screaming buys for November.
Bank of America
First up is money-center giant Bank of America (BAC -0.17%). You might be thinking, "Yuck, a bank stock," but long-term investors are seeing dollar signs from an industry that historically benefits from long expansions in the U.S. economy. Recessions are inevitable and also great times to scoop up bank stocks.
Bank of America is the most interest-sensitive big bank. When the Federal Reserve begins raising its federal funds rate in 2024 or thereabouts, BofA will likely see the greatest benefit in the interest income column. Since the Fed has no desire to make the federal funds rate negative, and BofA is far better capitalized than it was during the Great Recession, investors can safely assume the company has hit its trough.
Bank of America has also done a remarkably good job of controlling its noninterest expenses. In particular, BofA has been investing heavily in digitization, which has boosted online and mobile transactions. As more of its customers opt for digital transactions, BofA has consolidated some of its branches and lowered its expenses.
Bank of America isn't a sexy pick for investors, but it's going to make them money.
Did someone say something about a recession? Because Alphabet (GOOG -1.66%) (GOOGL -1.79%) didn't get that memo. After a relatively minor second-quarter hiccup, the parent company of Google search engine, YouTube, and Google Cloud reported a 14% year-on-year revenue increase in the third quarter.
Robinhood investors appear to have realized that Alphabet is just how dominant this company in the search space. Over the trailing-12-month period, Google's share of global search has ranged between 91.9% and 93%. That's essentially monopoly status, and demonstrates just how willing advertisers are to pay for prime placement on Google's search platform. Like Bank of America, Alphabet is susceptible to short periods of weakness during recessions, but given that economic expansions last much longer than recessions, Alphabet's ad business is almost always growing.
Yet the allure of Alphabet lies in its burgeoning ancillary operations. YouTube has become one of the top three most visited platforms in the world and has rightly seen its ad revenue soar, but Google Cloud is perhaps more intriguing. Cloud infrastructure margins handily trump ad-based margins. As Cloud, which hit an all-time high of $3.44 billion in revenue in Q3, grows into a larger percentage of total sales, Alphabet's operating margin and cash flow could seriously expand.
Admittedly, Square has some big expectations to meet. Its share price has roughly quadrupled since its March 2020 low after the company absolutely blew Wall Street's second-quarter expectations out of the water. While it's possible that Square will struggle to meet lofty expectations no matter what it delivers on the operating front this week, the bigger picture remains incredibly bright for the company.
Square's oldest operating model is its seller ecosystem, which provides merchants with point-of-sale devices and data analytics. Over the previous seven years, the seller ecosystem saw gross payment volume catapult from $6.5 billion to $106.2 billion, or an average of 49% growth per year. While that growth will be stymied by the coronavirus disease 2019 (COVID-19) recession, this merchant-fee-driven ecosystem is going to shine over the long run as larger businesses have begun to adopt the platform.
Yet Square's greater growth opportunity lies with peer-to-peer payment platform Cash App. Between the end of 2017 and the midpoint of 2020, Cash App's monthly active user count ballooned from 7 million to 30 million. Cash App is benefiting from the avoidance of cash during the pandemic, as well as the younger generation simply preferring digital transactions. Cash App enables Square to collect merchant fees, transfer fees, and bitcoin exchange fees, and could well become the company's leading generator of gross profit within the next year or two.