If you're an investor of any kind, your primary goal should be to buy stock in great companies. But if you're a beginning investor, your other goal should be diversification -- don't park all your money in one stock. Sure, we think every stock we buy is great. But we don't always get it right. Diversifying your portfolio across at least 15 to 20 stocks as quickly as possible acknowledges your fallibility, mitigates the downside risk for your mistakes, and still gives you the opportunity for upside when you get it right.
In keeping with the theme of diversification, here are four stocks for beginning investors. I believe Amazon.com (AMZN 3.66%) is a safe way to anchor your portfolio. Starbucks (SBUX 2.98%) and PayPal Holdings (PYPL 5.96%) are two mature, proven businesses with plenty more long-term upside. Finally, having diversity allows you to take on a little more risk, like with a small investment in TS Innovation Acquisitions Corp. (TSIA).
Amazon: The safe play
After a stellar year in 2020, everyone is talking about Amazon. The company blew previous revenue expectations out of the water, with net sales increasing 38% year over year to over $386 billion. The pandemic pushed e-commerce adoption further than ever, and Amazon was a primary beneficiary. It had the infrastructure to meet a lot of demand and continues to build it out further.
However, Amazon's e-commerce operations aren't the main profit driver here. Amazon Web Services (AWS) generated just 11.8% of Amazon's total revenue in 2020. But it provided a whopping 59% of the operating income. Not only did AWS grow sales by nearly 30% during the year, but it appears the company has formally recognized its importance to the business going forward. Founder Jeff Bezos is stepping down from the CEO role, and the head of AWS, Andy Jassy, is taking over that role.
Amazon stock price is up over 450% during the past five years, a phenomenal performance I doubt will be matched in the five years to come. That said, this market-beater has generated $31 billion in free cash flow over the past 12 months alone. This ongoing cash haul puts Amazon in an incredible position to not only defend its business but also find new avenues of growth. Therefore, I believe the stock is among the safest and offers the opportunity for market-beating upside.
Starbucks and PayPal: Two strong companies that aren't done yet
Need an easy-to-understand business? How about Starbucks? It sells coffee for a healthy profit in over 33,000 locations worldwide. Throughout its history, it's proven a resilient business. Its resilience was on full display in 2020 as restaurants closed to dine-in traffic. Comparable sales were down 14% for the year and full-year revenue was down 11%. This hit wasn't enough to sink Starbucks, though; it maintained profitability and kept paying its dividend.
As the pandemic passes, Starbucks will return to normal. And it has big plans for the next decade. The company has plans to open 22,000 new stores and enter new markets. This plan could grow revenue significantly and keep giving it room to raise dividend payouts in the future.
Starbucks stock has been a millionaire-maker in the past, but its growth plan should deliver market-beating returns for the foreseeable future. And if you buy Starbucks stock, don't forget to put it on a dividend reinvestment plan (DRIP) to help compound your gains.
And speaking of strong companies with a lot more growth planned, PayPal is also worthy of a place in your new portfolio. Long before the COVID-19 pandemic, there was a steady shift away from cash and toward digital payments. The coronavirus pushed adoption even further, speeding up PayPal's timeline for having 1 billion users. Management expects to reach 750 million users within five years.
For perspective, PayPal has about half that many users today. But it believes it can double the size of its business by growing its in-store presence, adding buy-now-pay-later services, and expanding cryptocurrency options, among other things. Since this is a technology infrastructure business, adding new users helps it gain tremendous operational leverage. Accordingly, management expects to generate $40 billion in free cash flow over the next five years -- just one of many good reasons to buy the stock today.
TS Innovation Acquisitions: One swing for the fences
Investors are enthralled with special purpose acquisition companies (SPACs) these days, but I've mostly watched on the sidelines. However, TS Innovation Acquisitions stands out from the crowd. This SPAC is merging with Latch, maker of smart devices and OS software for multi-family rental properties. Considering that the SPAC is led by Tishman Speyer, a global, commercial real estate developer, it seems like a match made in heaven.
Latch only just launched in 2017, and normally I'd be reluctant to invest in a company this young. But Tishman Speyer targeted Latch for this merger because it's a happy customer, which speaks volumes. Not only that, apparently Latch has a lot of happy customers: So far, it's never lost one. Furthermore, the average customer signs a six-year contract, giving the company great visibility into the future. For example, in 2025, it expects to generate $877 million in net revenue with free cash flow of $249 million.
Even for a young company, Latch may have a competitive advantage. Consider that 10% of new apartment buildings in the U.S. use Latch's products from the start. If this trend continues, the company will become more entrenched in its space.
Since Latch is a small-cap stock, the chance for significant upside is huge. That said, a lot could go wrong with a Latch investment today. That's why you should put the majority of your investing dollars in safer stocks like Amazon, Starbucks, and PayPal. But having stability in companies like these allows you to make a small bet on a company like Latch. If it fails, you won't be out much, and the other three stocks should more than make up for your losses. But if Latch succeeds, it could grow to a larger position in your diversified portfolio.
From here, be sure to stay curious and keep looking -- you'll need more diversity than what I offer here. But don't worry, there are a lot of great companies to invest in as you build your new portfolio.