Given the massive trading volume that GameStop (GME 1.85%) shares have seen over the past few days, there's clearly a huge appetite for explosively volatile stocks. I'll admit that it's exciting to imagine doubling your money in a day, despite the (very real) risk of taking huge losses instead. I understand why the businesses fundamentals might take a back seat to those short-term price prospects in that environment.
But it's just not a trade-off that I find remotely attractive as an investor.
Maybe you're in the same boat, preferring to own pieces of strong businesses and hold them for years. Or maybe the GameStop story has made you curious about investing for the first time, but you're not looking to add excessive risk to your portfolio. In that case, I've got a few stocks for your watchlist.
1. Costco wows its customers
Costco is the world's second-biggest retailer behind Walmart. That size alone conveys some great competitive advantages. Sales in the last year rose by $14 billion to $167 billion. GameStop's annual sales, in contrast, have plunged to below $5 billion over the last year.
Costco's powerful business model is another reason to like this stock. By reinvesting its subscription fees into price cuts, the chain maintains a price leadership that's impossible to resist. Customer traffic was strong before the pandemic hit and remained high through 2020.
The warehouse retailer also improved on its market-leading renewal rate, with over 90% of customers eagerly signing up for another year of access to its stores. Toss in the prospect for robust, if unpredictable, cash returns over the long term, and this stock might easily be a top performer in your portfolio.
2. PepsiCo has the right mix
No single investment has it all, but PepsiCo comes close to that target. The snack and beverage giant recently demonstrated the power of its diverse portfolio, with sales on tap to rise in 2020 by almost as much as they did in its blockbuster 2019 outing despite massive disruptions from COVID-19. While GameStop's revenue lines are shrinking as it exits niches like consumer tech, Pepsi is moving in the other direction by building out its snack, prepared food, and energy drink offerings.
Better yet, the company is generating tons of cash from those sales, which gives management plenty of resources to direct toward extending the company's market-share lead. That financial strength makes it likely that Pepsi will soon enter the exclusive club of Dividend Kings, too, as it approaches 50 consecutive years of annual dividend increases.
3. Target knows how to profit
If you're after faster earnings growth, consider Target stock. The retailer's status as an essential business helped it deliver staple products like groceries and home cleaning supplies during the early days of the pandemic. But Target's wider range of more premium merchandise really struck a chord with shoppers looking to upgrade their homes. Categories like consumer electronics, home furnishings, and apparel all contributed to market-thumping sales gains in the past year.
And Target earned a mint from those consumer discretionary sales, with it profit margin shooting well above that of peers like Walmart. Target generated $4.7 billion of operating earnings in the first three quarters of the year, up 36%. GameStop has posted ballooning net losses over the same period.
There's no guarantee that any of these stocks will keep beating the market as they have in recent years. But by focusing your portfolio on stable, strong businesses, you can limit the risk you take while still exposing your investments to some massive potential gains over time.