Whether you're a new investor or a seasoned professional, building a strong portfolio is critical. That means asking yourself certain questions: How many stocks should I buy? What types of stocks should I own? How would I feel if my portfolio dropped 20% in value?
The answers to those questions are different for everyone. But in my experience, it's helpful to own at least 15 stocks and to favor companies with a large market opportunity and a strong competitive advantage.
With that in mind, Apple (AAPL 4.01%), Axon Enterprise (AXON -4.69%), and Mastercard (MA 3.64%) look like the foundation of a healthy portfolio. Here's why these three companies would make great starter stocks.
Apple is the most valuable company in the world, with a market capitalization of over $2 trillion. Its brand name is essentially gold in the consumer electronics market, and the company has an installed base of 1.65 billion devices around the globe. That gives Apple a big advantage.
In fiscal 2020 (ended Sept. 30, 2020), the California-based company posted modest top-line growth of 6%, driven by strong sales in wearables and home products like the Apple Watch and AirPods, as well as solid growth in its services segment, which includes subscription products like Apple Arcade and Apple TV+.
In fiscal 2021, the company is off to a much stronger start. The launch of the iPhone 12 powered year-over-year revenue growth of 21% in the first quarter and early reports indicate the iPhone 13 may be even bigger. In fact, Wedbush analyst Dan Ives believes the next iPhone cycle will be a "game changer," powering Apple toward a $3 trillion valuation.
And the company's pipeline is full of new products. For instance, Apple recently partnered with Taiwan Semiconductor Manufacturing to develop micro-OLED displays. According to the Nikkei Asia Review, these ultra-thin displays will be built directly on silicon wafers, and each is reportedly less than 1-inch in size. In other words, this type of display would be ideal for a pair of augmented reality (AR) glasses.
Going forward, the company's strong brand name and innovative culture should help Apple continue to grow its business for many years to come.
2. Axon Enterprise
Axon has a noble mission: to protect life. With that in mind, the company provides hardware and software solutions that help public safety officials and law enforcement officers work more safely, transparently, and productively.
In the hardware segment, Axon is the market-leading provider of conducted energy devices (i.e., TASERs). The company believes these weapons can replace traditional firearms and bullets. Supplementing its TASER devices, Axon also sells sensors like body cameras, fleet (in-car) cameras, and aerial drone-mounted cameras. These products integrate with Axon's software to simplify evidence collection and promote transparency.
In the software segment, Axon Evidence is the world's largest cloud-based digital evidence management system. Video captured by sensors is stored in the cloud, reducing paperwork and the need for on-premise data storage. In both cases, that means law enforcement officers spend less time on administrative tasks and more time protecting their communities.
Likewise, Axon Records is a cloud-based records management system that uses artificial intelligence and video evidence to simplify the report-writing process.
Finally, Axon Respond is a computer-aided dispatch solution that went live in 2020. This new product helps 911 dispatchers communicate with incident response personnel like patrol officers, firefighters, and paramedics, and it supports real-time situational awareness for command staff through live video streams and location mapping.
Last year, Axon's robust portfolio helped it acquire several new customers, both in U.S. and international markets. Most notably, the company signed deals with federal agencies like U.S. Customs and Border Protection and the Department of Homeland Security, and it's currently conducting pilot programs with the Departments of Justice and Defense.
These customer wins helped Axon grow revenue 28% to $681 million in 2020. But management sees a massive addressable market of $27 billion -- 39 times its trailing-12-month sales. In other words, Axon still has plenty of room to grow its business, and the company's strong competitive position should make it a good long-term investment.
Mastercard operates the third-largest payments network in the world. And while many investors may associate the company with credit and debit cards, it has expanded beyond these core products. So it's important to understand exactly how Mastercard makes money.
First, it takes a percentage of the gross dollar volume (GDV) that flows through its network. Second, the company charges a fixed fee for each transaction. And third, it charges additional fees for other payment-related products like fraud detection, cybersecurity, and consulting services.
To boost GDV and transaction volume, Mastercard has launched new products aimed at increasing the scope of its payments platform. For example, last year it added account-to-account payments to Mastercard Track, a product that simplifies and automates business-to-business (B2B) payments. That's particularly noteworthy because management sees a massive $110 trillion market opportunity in account-based B2B payments.
As a caveat, investors should be aware that the payments industry is highly competitive, and Mastercard is still very dependent on in-store transactions. Not surprisingly, the pandemic has been a major headwind for the company, particularly in terms of cross-border payments. As a result, revenue dropped 9% in fiscal 2020.
Despite this, as the effects of the pandemic fade, revenue should rebound. Moreover, Mastercard's global network gives it a big advantage over smaller rivals, and the company's efforts to bring real-time account-based payments to its platform, coupled with its support of cryptocurrency, should help it continue to grow its business over the next decade.