When the curtain closes on 2020 in a little over six weeks, it'll go down as one of the wildest years on record for the stock market. We've watched the benchmark S&P 500 lose more than a third of its value in under five weeks, as well as regain everything that was lost in less than five months. That's a decade's worth of volatility crammed into about six months.
For long-term investors, these wild swings have been blessings in disguise, allowing patient investors to scoop up shares of innovative businesses at perceived discounts.
However, this wild volatility has also attracted a slew of young and novice investors to try their luck on Wall Street. Online investing app Robinhood, which made a name for itself by offering commission-free trades and gifting free shares of stock to new members, has added millions of new users this year. That's notable because the average age of its members is only 31.
Getting young people to put their money to work in the fastest wealth creator on the planet is actually great news. Time is the biggest ally investors have, and the younger people begin putting their money to work in stocks, the greater the potential to compound their wealth.
At the same time, Robinhood users aren't always investing with the long term in mind, and they certainly aren't buying the highest-quality stocks at times. Robinhood's leaderboard of the 100 most-held stocks on the platform is filled with penny stocks and awful businesses.
Yet, mixed among the bad apples are a number of gems that Robinhood investors have piled into. While Wall Street isn't so keen on the following three stocks, I strongly believe that Robinhood investors who hang on for the long term will be vindicated and prove the professionals wrong.
This might be hard to believe, but only 33% of Wall Street professionals recommend Warren Buffett's Berkshire Hathaway (BRK.A 0.55%) (BRK.B 0.49%) as a buy, according to Robinhood's leaderboard. That means two-thirds wouldn't suggest investors put their money to work in Berkshire Hathaway right now. I think that's a mistake.
Few investors have the long-term track record of success that investment manager Warren Buffett and his team bring to the table. Over the last 55 years, Berkshire Hathaway has delivered an average annual gain for its shareholders of 20.3%. That's more than double the 10% average annual return for the S&P 500 over the same time frame, including dividends paid. In aggregate, Berkshire's stock has outperformed the benchmark index by more than 2,700,000% since 1965. I wouldn't dare bet against expertise like that.
What's more, Buffett has built Berkshire Hathaway's investment portfolio to align with the health of the U.S. and global economy. In other words, it's a predominantly cyclical portfolio, with over 90% of the company's assets tied up in technology, financials, and consumer staples. Since economic contractions and recessions are measured in months, while bull markets and periods of expansion are counted in years, Buffett is playing a numbers game that he's bound to win.
In case you need one more reason to believe in Berkshire Hathaway, Buffett and right-hand man Charlie Munger have repurchased close to $22 billion of their own stock since mid-2018.
Another popular Robinhood stock getting no love on Wall Street is money-center bank Wells Fargo (WFC 0.81%). Only 29% of Wall Street professionals view Wells Fargo as a stock to buy right now, which means 20 of 28 covering analysts would advise their clients to sit tight or sell.
Unlike with Berkshire Hathaway, there are at least reasons for Wall Street analysts to be skeptical of Wells Fargo. The bank admitted in 2017 that it had opened 3.5 million unauthorized accounts between 2009 and 2016. It's also contending with the Federal Reserve's ultra-dovish monetary policy. Bank stocks are the real losers of historically low interest rates, with interest income shrinking considerably.
But most of Wall Street seems to be ignoring history. Recessions are often excellent chances to pick up time-tested bank stocks like Wells Fargo. The bank has always been particularly successful at courting well-to-do clients. Since the wealthy are less likely to change their buying habits during economic hiccups, they're the perfect source of profit generation for Wells Fargo.
Similar to the idea I covered with Berkshire Hathaway, banks are cyclical businesses. We look to have hit the bottom of the most recent recession, which means banks can look forward to years of deposit and loan growth to come. Meanwhile, patient investors can relax knowing that Wells Fargo is well capitalized and delivering a 1.7% yield.
Investors are also able to buy Wells Fargo for a mere 62% of book value, which is nearly its cheapest valuation relative to book in over 30 years. I believe Wall Street will regret not being more bullish on Wells Fargo.
You might also be surprised to learn that fintech stock Square (SQ -0.51%) isn't particularly well liked on Wall Street. Out of 43 analysts covering Square, only 47% believe it's worth buying, with 12% rating the company a sell.
Why no love for Square? The answer probably lies with the more-than-quadrupling in Square's share price since the March 2020 low. With the company briefly bolting above $200 a share, Wall Street analysts likely believe Square will have to live up to lofty expectations. But I predict it'll do just that.
Having recently reported its third-quarter operating results, investors can see that Square is killing it. Revenue was up 140% year-over-year, with its seller marketplace reporting a 12% increase in gross profit even amid the pandemic. If larger businesses continue to adopt Square's payment platform, this merchant-fee-driven segment could still offer huge upside.
What's arguably even more impressive is the company's peer-to-peer payment platform, Cash App. This digital payment platform has attracted more than 30 million monthly active users (more than tripling its total at the end of 2017), and it delivered a gross profit jump of 212% in the most recent quarter from the prior-year period. Cash App generates revenue from merchant fees, investments, bitcoin exchange, and traditional bank transfers for Square.
Long story short, Square has the real potential to more than quadruple its full-year sales between 2019 and 2024. That's a trend Robinhood investors should get behind.