The stock market can be bewildering for new investors. The financial jargon is confusing, the endless noise about hot stocks is distracting, and it's tempting to chase the so-called stock gurus instead of doing your own due diligence.
But generally speaking, new investors shouldn't chase speculative high-growth stocks without building a core portfolio of well-established companies first. Let's take a closer look at three great starter stocks that fit that description: Amazon (AMZN -0.17%), Walt Disney (DIS 1.11%), and Johnson & Johnson (JNJ -0.97%).
Amazon is the world's largest e-commerce and cloud infrastructure company by annual revenue. Its top e-commerce markets include the U.S., Germany, the U.K., and Japan, and it served over 150 million Prime subscribers globally last year. Amazon Web Services (AWS) controlled 31% of the global cloud infrastructure market in the second quarter of 2020, according to Canalys.
Amazon generates most of its revenue from its e-commerce marketplaces, but it generates most of its profits from AWS. AWS' profits enable Amazon's online marketplaces to sell their products at low margins and use loss-leading strategies to crush smaller retailers.
This business model, along with the ongoing expansion of its ecosystem with new hardware devices, streaming media services, brick-and-mortar stores, and perks for Prime members, consistently widens Amazon's moat. That's why its stock has rallied nearly 400% over the past five years and shows no signs of cooling off.
Analysts expect Amazon's revenue and earnings to rise 35% and 52%, respectively, this year, as the pandemic lights a fire under its e-commerce and cloud business. Next year, they expect its revenue and earnings to rise 18% and 30%, respectively, against tougher year-over-year comparisons.
Amazon's stock might seem pricey right now at 60 times forward earnings, but I believe its dominance of the e-commerce and cloud markets easily justify that slight premium.
Disney struggled throughout the pandemic as it shut down its theme parks and postponed its tentpole movies. Its cable business also continued to lose subscribers to streaming rivals, and the cancellation of live sporting events exacerbated the pain for its top cable sports network ESPN.
But despite all that pressure, Disney's stock remains up 35% over the past five years, and up 6% this year. That's because most of its pain seems temporary, and its massive theme park and movie business -- which includes Marvel, Pixar, and Star Wars -- are expected to quickly recover after the pandemic ends.
Disney's streaming platforms are still losing money, but they increased their totals to 120 million paid subscribers -- including 73.7 million Disney+ subscribers -- last quarter. Disney hasn't matched Netflix's audience of 195 million global subscribers yet, but it's far ahead of confused underdogs like AT&T's HBO Max.
Wall Street expects Disney's revenue to rise 5% this year, but for its earnings to drop 5% -- mainly due to its loss of high-margin theme park and movie revenue and the ongoing losses at its streaming business. But next year, analysts expect its revenue to rise 20% and for its earnings to surge 149% as the pandemic passes and its core growth engines restart.
Disney's stock might look pricey right now at nearly 70 times forward earnings, but that multiple could quickly contract as its profits rebound. Therefore, Disney remains a reliable investment for long-term investors -- and it's weathered plenty of downturns since its IPO 63 years ago.
3. Johnson & Johnson
Johnson & Johnson is one of the world's largest pharmaceutical, medical device, and consumer healthcare companies. It went public 76 years ago and has raised its dividend annually for 58 straight years -- making it one of the most widely recognized Dividend Kings of the S&P 500.
J&J has suffered setbacks before, including patent expirations for top-selling drugs, safety problems with consumer products like Tylenol and talc-based Baby Powder, and lawsuits regarding opioid sales and off-label usages of certain drugs. Over the past year, the pandemic also throttled its medical device sales by postponing non-essential surgeries.
But J&J has repeatedly bounced back since its business segments are so well-diversified that its strengths usually offset its weaknesses. Analysts expect its revenue to stay roughly flat this year as its earnings decline 8%.
But next year, those same analysts expect J&J's revenue and earnings to grow 9% and 12%, respectively, as the pandemic headwinds wane and it continues generating robust sales of top cancer drugs like Darzalex and Imbruvica.
J&J's stock has rallied more than 40% over the past five years, and it generated a total return of 65% after factoring in reinvested dividends. The stock trades at just 17 times forward earnings and pays a decent forward yield of 2.7% -- which makes it a great starter stock at a reasonable price.