Historically, the stock market returns around 10% annually. But many analysts don't expect this to continue, at least not over the next five years. According to Bankrate's Second-Quarter Market Mavens survey, 61% of surveyed analysts say stocks will underperform the historic average over the next five years. Keep in mind, this survey took place in June, and the S&P 500 has risen 20% just since then! I bet those experts really expect stocks to underperform now.
The sentiment of the experts seems to be that of the everyday investor. The market feels irrationally exuberant right now, and valuations are soaring. But if you're afraid of a possible market crash, I believe the worst thing you could do is stop investing altogether. Rather, consider investing in some low-risk stocks. Here are three ideas for your consideration as we head into the new year.
I know what you're thinking: Starbucks (SBUX 0.09%) sells premium coffee, a discretionary purchase that consumers could forgo in harsh economic times. How can it be a low-risk investment?
You'd be hard-pressed to find a more consistent business than Starbucks. Sales growth can come two ways: Opening new stores and increasing sales at old stores. When sales increase at old stores, we call this comparable-sales growth. Starbucks has reported comp-sales growth in all but three years since going public -- including its 14% comp-sales drop for fiscal 2020. That's a great track record. Furthermore, it's maintained full-year profitability ever since its 1992 IPO, including over $900 million in net earnings in 2020 despite the pandemic. To me, this clearly demonstrates the company's low-risk profile.
Starbucks endures the tough times but thrives in good times. And it has a rosy outlook for the coming decade. In the company's recent biennial investor-day presentation, management discussed how it plans to capture a still-growing coffee market through comp-sales growth and new store growth. In fact, it plans to grow from over 32,000 worldwide locations to 55,000 by 2030, making it the largest restaurant company on the planet. This should lead to annual double-digit earnings growth and support a growing dividend, giving investors plenty of upside over the next 10 years.
2. Axon Enterprise
People from all walks of life have vocally debated how to reform criminal justice during the past year. There's disagreement over what needs to happen, but I hear a common thread: We must protect human life. Incidentally, "protecting life" is part of the mission statement for Axon Enterprise (AXON 0.51%), a law enforcement hardware and software company.
Axon Enterprise is already entrenched as an essential part of budgets for many law enforcement agencies. The company's TASER devices can save lives in certain situations, its body cameras can increase accountability and help ensure justice, and its software can simplify officers' paperwork, getting them back out in the field. This even has application at the federal level, with Axon's third-quarter sales to federal customers up 400% year over year.
As a result of its transition from a pure hardware company to a software-as-a-service player, Axon has doubled annual recurring revenue (ARR) over just the past two years to more than $200 million currently, and it's boosting the company's bottom line quickly. Given Axon's ability to address a crucial social issue and its improving business model, this is a stock you can buy and hold with confidence over the long haul.
3. Universal Display
Of the three companies presented in this article, Universal Display (OLED 4.36%) may have the most defensible business of the bunch. Organic light-emitting diode (OLED) technology is used for TV and smartphone screens, and consumers prefer OLED screens at an increasing rate. According to Mordor Intelligence, the OLED market is expected to grow at a 12.9% compound annual growth rate (CAGR) over the next five years.
Universal Display will be the primary beneficiary of this shift to OLED. The company holds many OLED-related patents, forcing manufacturers to pay up for the raw materials and for licensing their intellectual property. This means the company doesn't have to assume the risk of making and marketing hardware devices.
This results in Universal Display having an extremely profitable business. Through the first three quarters of 2020, even though sales were down because of the pandemic, it still recorded a 27.7% net-profit margin. The company also has a stellar balance sheet, with $673 million in cash and equivalents and zero debt.
Which one today?
Of the three low-risk stocks here, the one I'd be most reluctant to buy today would be Universal Display. The company may be poised for a great holiday season, but the stock trades at almost 30 times trailing sales, which is toward the high end of its historical range. Ideally, I'd prefer a cheaper entry point.
By contrast, Starbucks is the stock I'd buy today if I could only buy one. Its price-to-sales ratio of five is much more palatable considering its 10-year growth targets. Furthermore, even if it underperforms over the next few years, it currently pays a dividend with a yield of 1.6%. That's not a high yield, but it adds another beneficial layer to a Starbucks investment for risk-averse investors.