Three top stocks that are poised to outperform over the long term are e-commerce and cloud computing titan Amazon (AMZN 1.30%), water utility giant American Water Works (AWK 0.51%), and videoconferencing specialist Zoom Video Communications (ZM 3.49%).
The companies behind these stocks have sustainable competitive advantages that have propelled them to leadership positions in their respective core markets. These advantages should continue to drive their profit growth and power their stock prices higher.
You can open a position in these stocks with as little as $1,000 (or less) because some online brokerages allow you to buy fractional shares. So it doesn't matter that one share of Amazon is priced much higher than $1,000.
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3 top stocks poised for long-term outperformance
|
Company |
Market Cap |
Forward P/E |
Projected 5-Year Annualized EPS Growth* |
YTD 2020 Return |
10-Year Return |
|---|---|---|---|---|---|
|
Amazon |
$1.6 trillion | 95 | 36.4% | 77.9% | 1,700% |
| American Water Works | $27.3 billion | 39 |
8.4% |
24.5% | 646% |
| Zoom Video Communications | $101 billion | 121 |
N/A |
419% | N/A** |
| S&P 500 | -- | -- | -- | 17.6% | 264% |
Data sources: YCharts and Yahoo! Finance. Data to Dec. 30, 2020. YTD = year to date. *Wall Street projections. **Initial public offering was in April 2019.
Amazon
The pandemic has boosted Amazon's already lofty growth potential. The crisis has accelerated the trend toward shopping online, and Amazon's status as the world's e-commerce leader positions it to continue to reap outsize benefits.
E-commerce still has a long runway for growth. In the first three quarters of 2020, online sales accounted for 14% of total U.S. retail sales, according to data from the U.S. Census Bureau. The international percentage historically trends a little higher.
Moreover, the company's other main business, Amazon Web Services (AWS), should also get a long-term lift from the pandemic. The crisis has sped up the migration of entities of all types to the cloud. This is another market that's dominated by Amazon, making it ideally positioned to profit from this trend.
Amazon has many other businesses with big growth potential: digital advertising, smart-home products, healthcare, and more. And it's a certainty the company will continue to enter entirely new markets.
American Water Works
American Water is a stock that you can buy and hold forever. From boom times to recessions, there will always be strong demand for the company's main product, fresh water, and its main service, wastewater treatment. Moreover, its core business is a legal monopoly, so competition isn't an issue.
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The above could be said about any U.S. regulated water utility, so what makes American Water stand out? It's the sector's largest and most geographically diverse company. (It will have regulated operations in 15 states once it closes on the sale of its New York State business.) This gives it a huge advantage in acquisitions, and it's the best positioned among its peers to continue to profit from the consolidation of the fragmented U.S. water utility business.
The fact that the stock pays a dividend is a big plus even if you don't need current income. If you reinvest your dividends, the number of shares you own will increase exponentially over time. American Water's dividend is currently yielding about 1.5%.
Zoom Video Communications
Videoconferencing specialist Zoom's business has received a powerful tailwind from the pandemic, as its services have enabled people to work, learn, and socialize from home. This fact naturally has investors concerned about what will happen to its business once the crisis ends.
Sure, Zoom will lose some of the new business it's won solely due to the pandemic. Some organizations will require some or all of their employees who are now working remotely to return to their pre-pandemic workplaces. They will no longer need to provide these employees with Zoom's services. (The company will also lose some business from individuals, who have embraced its services to socialize virtually, though most of these folks are probably using Zoom's free service.)
However, keep a couple of things in mind. First, Zoom was growing rapidly before the pandemic began. In its most recent quarter unaffected by the crisis, its revenue surged 78% year over year. Second, the work-from-home trend was underway before the pandemic, which simply accelerated it. Some employers that have found that their employees are just as effective working from home are likely to consider allowing them to choose to continue to do so. The benefits to the employer are happier employees and lower costs in facilities and other areas.
