Investing in 2020 has been challenging, to say the least. Even with volatility always present in the stock market, the wild vacillations we've witnessed in equities this year on the heels of the coronavirus disease 2019 (COVID-19) have been unprecedented. In a six-month stretch, we saw the S&P 500 lose more than a third of its value and then gain it all back.
To make matters even more complicated, Wall Street has been riding a wall of worry for months concerning the now-passed U.S. elections. Wall Street likes certainty, and virtually nothing has been certain on Capitol Hill in recent months.
For millennial and novice investors, these wild swings in the stock market have acted as an insatiable lure. A quick look at membership figures for online investing app Robinhood shows that the platform has added millions of new users in 2020, with 31 being the average age of its users.
Having young investors put their money to work in the stock market is an excellent thing because millennials can use time to their advantage and compound their wealth many times over. But in many instances, it doesn't appear that Robinhood investors are in it for the long haul. A closer examination of Robinhood's leaderboard (the most-held stocks on the platform) reveals a long list of awful companies and whatever stocks happen to be popular in a given week. Robinhood's failure to educate its members about the advantages of long-term investment is setting them up for failure.
Thankfully, there's a pretty easy solution: Buy high-quality companies.
With the election voting now over, Wall Street and investors can begin to look past the distractions that have cluttered news feeds for months and focus on what actually matters, like operating earnings growth and innovation. With this in mind, here are three post-election stocks that I strongly believe all Robinhood investors should own over the long run.
To be frank, it was never going to matter who won the White House or which political party was in charge of Congress. Amazon (NASDAQ:AMZN) was going to remain a high-growth beast no matter what, which is why it belongs in the portfolios of Robinhood investors.
Most people know Amazon for its dominant online retail marketplace. According to analysts at Bank of America/Merrill Lynch, Amazon controls 44% of all U.S. online sales, with eMarketer placing its estimate at 38.7% in 2020. Whichever forecast you prefer, the fact remains that Amazon holds a lead of between 33 percentage points and 37 percentage points over its next-closest online retail competitor. That's a great position to be in for a country that's reliant on consumption for its gross domestic product.
Although retail is a generally low-margin operating segment, Amazon is finding ways to pivot its online dominance into added sales and cash flow. For example, being the go-to for online sales has allowed Amazon to sign up more than 150 million Prime members worldwide. The annual fees Amazon collects from Prime members provides an added buffer that allows it to undercut brick-and-mortar retailers on price. Prime members are also less likely to shop elsewhere and spend more each year with Amazon.
Over the longer run, it's the company's infrastructure cloud segment, Amazon Web Services (AWS), that's particularly promising. As COVID-19 has disrupted the traditional work environment and normal consumer activity, we've witnessed an accelerated shift of businesses online and into the cloud. AWS provides the basic building blocks small and medium-sized businesses need to build out their clouds.
Since cloud margins are considerably better than retail margins, AWS will have an exponentially greater impact on operating cash flow as it grows into a larger percentage of total sales. In other words, look for Amazon's operating cash flow to triple over the next four or five years.
Innovative Industrial Properties
One of the biggest downsides of the Robinhood platform is the inability to buy over-the-counter-listed equities. This means Robinhood users can't buy a number of top-tier U.S. marijuana stocks. Thankfully, investors still have access to Innovative Industrial Properties (NYSE:IIPR), which looks to be a great buy in the post-election environment.
Innovative Industrial Properties, or IIP, is a cannabis-focused real estate investment trust (REIT). It acquires medical marijuana growing and processing sites and leases them out for very long periods of time (usually 10 to 20 years). IIP reaps the rewards of consistent and predictable rental income, while also passing along annual rental hikes to its tenants. When combined with a 1.5% property management fee, IIP has modest organic growth built into its primarily acquisition-driven operating model.
As of the beginning of November, Innovative Industrial Properties owned 63 properties that covered 5 million square feet of rentable space in 16 states. More than 99% of this square footage was rented out for a weighted-average lease length of 16.2 years.
IIP is also benefiting from the lack of traditional financing options for vertically integrated multistate operators in the United States. Since cannabis remains illegal at the federal level, financial institutions have been somewhat unwilling to lend and offer basic banking services to pot companies.
IIP has stepped in with its sale-leaseback agreements. Under these agreements, IIP acquires properties for cash, then immediately leases them back to the seller. This allows IIP to pick up long-term tenants with ease while providing multistate operators with sorely needed cash.
It's no secret that the U.S. is the most lucrative marijuana market in the world. That makes Innovative Industrial Properties an intelligent way to play the high-growth prospects of this industry.
Square's foundational operating segment is its seller ecosystem. Square provides point-of-sale devices and analytics tools to businesses, with the company generating merchant fees off of the gross payment volume (GPV) crossing its network. Between 2012 and 2019, Square's GPV grew by a healthy 49% per year to $106.2 billion. While investors can expect this figure to be negatively impacted by COVID-19 business shutdowns in 2020, the future for the seller ecosystem remains bright.
Another thing worth noting about the seller ecosystem is that it's no longer just for small businesses. Square identifies medium and large businesses as those generating more than $125,000 in GPV on an annualized basis. In each of the first two quarters of 2020, 52% of total GPV came from these medium and large businesses. If this trend continues and larger businesses take up Square's seller ecosystem, merchant fees could move significantly higher.
But it's Square's peer-to-peer payment platform Cash App that's been generating all the buzz of late. Monthly active-user count has more than quadrupled from the end of 2017 to 30 million, as of June 30, 2020. We've also seen approximately 7 million Cash App members using Cash Card -- a traditional debit card that links to a users' Cash App balance.
Whereas the seller ecosystem is predominantly built around merchant fees, Cash App collects merchant fees, transfer fees, and bitcoin exchange fees. The younger generation is expected to make Cash App Square's top profit generator very soon.