If you invest in the stock market long enough, you're bound to see something unprecedented.
Last year, it was the coronavirus disease 2019 (COVID-19) crash, which wiped 34% off of the benchmark S&P 500 in under five weeks. Meanwhile, in 2021, it's the historic battle between retail investors and big-money institutional investors.
Investors should ditch Sundial Growers and AMC Entertainment
Over the past three weeks, retail investors on Reddit's WallStreetBets chatroom have been banding together to buy shares and out-of-the-money call options on a small subset of stocks. Many of these companies fit one of two qualifications. They either have high short interest, upon which retail investors are attempting to effect a short squeeze, or they boast a low share price. That's why we've witnessed the likes of movie theater operator AMC Entertainment (AMC -8.03%) and Canadian marijuana stock Sundial Growers (SNDL -5.31%) ascend to the heavens.
Unfortunately, the stocks that retail investors keep chasing higher have disconnected from their underlying fundamentals in a big way.
For example, AMC was on the cusp of bankruptcy before its stock rocketed from under $3 to as high as $20 a share. Although the company was able to raise cash by selling shares of its common stock and issuing debt, this doesn't guarantee its survival. Without an end to pandemic, AMC's movie theaters remain closed or largely unfilled. And if that weren't enough, AT&T subsidiary WarnerMedia is releasing its new movies on HBO Max the same day they hit theaters in 2021.
Meanwhile, Sundial Growers has aggressively raised over $600 million in cash and paid off its debt, but has done so by drowning existing shareholders in new share issuances. The company's share count has ballooned by over 1 billion shares in just four months. Now sporting a valuation in the billions of dollars, Sundial continues to lose money and is miles behind its Canadian peers in the retail cannabis market.
These stocks can make investors rich
Put simply, the moves we're witnessing in Sundial and AMC aren't sustainable. They're driven by emotion and not operating earnings growth, which is a recipe for disaster.
If you want to get rich the right way, you'll need to buy quality companies and hang onto them for long periods of time. The following trio of companies fits the bill perfectly.
Don't be turned off by the fact that Pinterest's (PINS -0.99%) shares are up nearly 260% over the trailing year. This social media company is still in the early inning of its growth phase and has the potential to be a 10-bagger over the next 10 years.
Prior to the pandemic, Pinterest's monthly active user (MAU) count was growing by an average of 30% annually between 2017 and 2019. This growth accelerated to 37% last year, which is likely a function of people being stuck in their homes in response to the COVID-19 pandemic. But no matter how you look at Pinterest's MAU data, the crystal clear conclusion is that it's becoming more popular with each passing quarter.
What gives Pinterest such robust sales growth potential is its focus on international markets. Of the 124 million net new MAUs gained in 2020, 114 million came from outside the United States. Though average revenue per user (ARPU) outside the U.S. ($0.88) is only a fraction of what it is in the U.S. ($15.34), these ex-U.S. users give Pinterest the opportunity to grow its international ARPU at a lightning-quick pace. The more users Pinterest attracts, the easier it's going to be to attract ad dollars.
Also, don't overlook just how perfect a platform Pinterest is for e-commerce. Rather than having to extract information out of its users, Pinterest's MAUs willingly post about the things, places, and services they like. This makes it incredibly easy for small businesses to target these users. As the medium, all Pinterest has to do is keep its user base engaged and ensure that small businesses have the tools they need to be successful.
Green Thumb Industries
If you really want to own marijuana stocks, Sundial Growers should be just about the last name investors buy. Instead, focus on successful U.S. multistate operators that are on the cusp of recurring profitability, like Green Thumb Industries (GTBIF 6.82%).
Green Thumb's success comes from a variety of factors. For starters, the company is relatively selective in the market's it's chosen to operate. It currently has 52 operating dispensaries in legalized states, with the ability to open as many as 96 retail locations in a dozen states. What stands out is the company's focus on states like Illinois, Nevada, and New Jersey -- the latter of which legalized recreational pot in the November election. Illinois, for instance, is a limited license state (i.e., only a set number of retail locations will be allowed). With the Land of Lincoln reaching $1 billion in weed sales in its first year following the legalization of adult-use pot, Green Thumb stands a good chance of securing significant share in this budding market.
Another reason Green Thumb is so successful is its inorganic growth. In June 2019, Green Thumb closed on its acquisition of Integral Associates, giving the company access to more than a half-dozen retail locations in Nevada, including the sole location on the Las Vegas Strip. The tourist-reliant Silver State is projected to lead the country in cannabis spending per capita by mid-decade.
Lastly, Green Thumb generates around two-thirds of its revenue from derivatives (e.g., edibles, beverages, vapes, topicals, and concentrates). Derivatives offer substantially higher margins than dried cannabis flower, which is a big reason Green Thumb is turning the corner to profitability before many of its peers.
A final stock that can make investors rich is edge cloud services provider Fastly (FSLY -1.57%).
Similar to Pinterest, Fastly is a company that's benefited handsomely from the COVID-19 pandemic. With businesses pushing online and into the cloud, it's seen traffic on its network increase. Fastly is responsible for safely and securely expediting the delivery of content to end users.
Interestingly, it's not always been smooth sailing for the company. In October, Fastly's third-quarter sales update roiled Wall Street. The company modestly lowered its forecast after ByteDance, the parent of TikTok, pulled most of its traffic from Fastly's network. During the first-half of 2020, TikTok was Fastly's leading revenue generator (about 12% of total sales).
Yet when Fastly reported its third-quarter operating results, you'd hardly know that TikTok's traffic was significantly reduced. Total sales jumped 42% from the prior-year period, and more importantly we saw a dollar-based net expansion rate of 147%. In layman's terms, this means the company's existing clients spent 47% more in the September-ended quarter than they did in the previous year. Fastly is having no issue taking on new clients and is scaling up right alongside its rapidly growing clientele.
With online traffic expected to grow well after the pandemic ends, Fastly has a real shot at tripling its sales over the next four years.
This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.