Please ensure Javascript is enabled for purposes of website accessibility

Forget Penny Stocks: These 3 High-Quality Companies Are Better Investments

By Lou Whiteman, Rich Smith, and John Rosevear - Feb 27, 2021 at 7:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These solid businesses have track records of success, but they're still trading at bargain levels.

A lot of penny stocks have gotten off to amazing starts in the market this year. Bargain hunters have flocked to the category -- comprised of stocks that trade for less than $5 per share -- looking for tickers that can blast higher and grow shareholders' money quickly.

For example, Castor Maritime (CTRM 3.74%), a previously little-known shipping company with a market capitalization of less than $30 million as recently as December, saw its stock shoot up more than 750% in the early days of 2021.

These sorts of movements, by their nature, are nearly impossible to predict, and chasing them can wipe out a lot of your net worth very quickly if trends suddenly reverse.

Long-term investors would do well to steer clear of the frenzy and instead focus on solid companies with the proven ability to post solid results. Here's why three Fools are ignoring penny stocks and focusing on XPO Logistics (XPO 5.61%), General Motors (GM 4.00%), and Best Buy (BBY 2.49%) instead.

Pennies stacked on financial papers.

Image source: Getty Images.

A shipping company that has delivered over the long haul

Lou Whiteman (XPO Logistics): XPO Logistics provides a suite of transportation services to customers primarily in North America and Europe. But don't let the diesel fool you: This is a tech-powered business set up well to take advantage of megatrends like the growth of e-commerce.

The company's XPO Direct service offers logistics and delivery products to online and brick-and-mortar retailers to help them better compete with Amazon. Few retailers have the size and scale on their own to match the e-commerce leader, but by joining forces on the XPO platform, they can better match it on efficiency.

XPO also is automating the brokerage side of the business, allowing shipping customers and truckers to connect digitally to each other, which brings down costs and more efficiently fills cargo holds. And it has invested heavily in robotics, with more than a quarter of North American e-commerce direct-to-consumer volume shipped with help from automation in 2020.

XPO's stock price has an impressive story behind it, too -- it's up by more than 100% from its late March pandemic low, and up by more than 45% from where it started 2020. And to highlight the difference between this company and penny stocks, XPO has a long record of high performance: The stock has gained 1,200% in the past 10 years.

Management isn't resting on those gains. The company arguably suffers from a "conglomerate discount," a term used to describe how some companies that operate in a variety of businesses get valued at lower multiples than more pure-play operators. XPO trades at an enterprise value of 13.2 times earnings before interest, taxes, depreciation, and amortization (EBITDA). Trucking specialist Old Dominion Freight Line, by comparison, trades at 21.1 times EBITDA, and logistics specialist C.H. Robinson Worldwide is valued at 16.6 times EBITDA.

However, by the end of the year, XPO expects to split its trucking and logistics businesses into two more-focused public companies. That may help close the valuation gap. Even without the split, XPO's businesses appear to be performing well, giving me confidence this company can continue to deliver for investors for years to come.

Like EV stocks? Here's one that's actually a good investment

John Rosevear (General Motors):  If you've been investing long enough to remember the bad old days of "Government Motors" (or the even-worse old days of GM "quality" in the 1980s), General Motors might seem like a weird stock recommendation. But consider:

  • Under CEO Mary Barra, GM has gone "all in" on electric vehicles, rolling out its brand-new Ultium EV architecture and promising a slew of battery-powered models over the next few years that will deliver something that most rivals' EVs still don't: Profits. 
  • Speaking of profits, GM's high-margin gas-powered pickups and SUVs have been selling like hotcakes despite the pandemic, driving the automaker to a fourth-quarter profit that soared past Wall Street expectations. (It might seem weird for GM to be touting EVs and feasting on truck profits at the same time, but there's a method to its madness: Today's trucks and SUVs are funding the electric-vehicle programs that will become its future.)
  • GM forecast another nicely profitable year in 2021 when it reported earnings in early February. But it hedged that guidance with concerns about a global shortage of semiconductors, leaving auto investors concerned about prolonged production disruptions. Good news, though: CFO Paul Jacobson said on Wednesday that the worst of the shortage appears to be over. 
A GMC Hummer EV, an electric truck, off-road in a desert landscape.

GM's electric Hummer EV is big, brawny, and expensive, just as you'd expect. But it'll be followed by a raft of new electric vehicles using the same technology, some of which will be much more affordable. Image source: General Motors.

Sure, unprofitable EV start-ups might be more fun for investors, at least while the bull market continues. But between the Ultium platform, its Cruise autonomous-vehicle subsidiary, and those hugely profitable trucks, GM is better-positioned than most automakers -- old and new alike -- for the transition to smart, connected, zero-emissions vehicles. 

That makes GM a better bet than most for long-term profit growth. And trading at just 10 times its expected 2021 earnings, GM's stock is still a relative bargain -- meaning that it's a good bet for long-term share-price growth as well. 

Best Buy: It's right there in the name

Rich Smith (Best Buy): The past week's sell-off hasn't been a whole lot of fun for investors, but here on the other side of the slide, you might have noticed that there's finally a silver lining within the dark clouds of tech-sector despair.

Some -- not many, but a few -- stocks are looking a bit more attractive at their post-sell-off prices.

Take Best Buy, for example. As one of the heroes of the pandemic, the retailer offset the loss of foot traffic to its stores by implementing curbside pickup and buy-online-pickup-in-store models, allowing it to efficiently meet the technology needs of millions of people who suddenly had to kit themselves out to work from home.

You have to admit -- that has worked out pretty well. In its Q4 earnings report Thursday, Best Buy reported 9% profit growth year over year, 11% sales growth, and 89% growth in online sales.

And even before the pandemic, this retail superstar was doing just fine, turning 4% average annualized sales growth over the past five years into 15% annualized earnings growth (according to S&P Global Market Intelligence data). That kind of high-quality performance bodes well for Best Buy in 2021 and beyond, whether COVID-19 continues to boost work-from-home electronics sales or not.

Best Buy is, quite simply, the kind of stock where even a "return to normal" should be more than enough to make an investor happy. And best of all, after this week's slide, Best Buy stock sells for less than 15 times trailing earnings. For a company that has proven its ability to grow earnings at 15% annually over the long term, and that pays its shareholders a steady dividend that currently yields 1.9%, that's a bargain price -- and a much safer investment than any penny stock you can name.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

XPO Logistics, Inc. Stock Quote
XPO Logistics, Inc.
$52.35 (5.61%) $2.78
General Motors Company Stock Quote
General Motors Company
$37.42 (4.00%) $1.44
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
$82.05 (2.49%) $1.99
Castor Maritime Inc. Stock Quote
Castor Maritime Inc.
$1.94 (3.74%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.