Invest in what you know. That was a guiding principle of investing legend Peter Lynch, the former Fidelity portfolio manager. What he meant by that was, do your research and know the company you are investing in.
Lynch also said to invest in what you're good at, whether that is finding value, investing in smaller companies, identifying growth stocks, or focusing on a particular industry or sector. This second part can only come from experience, after you have invested for a while and can draw conclusions on where your successes lie.
These two simple lessons can help guide beginners along their investing journeys. But knowing where to begin from the universe of more than 5,000 stocks traded on U.S. exchanges can be a daunting task. A good place to start is with large, stable companies that you probably know something about, such as Bank of America (BAC +0.78%) and Walt Disney (DIS +2.30%). Let's find out a bit more about these two stocks.
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1. Bank of America: More bank for your buck
Bank of America is the second-largest commercial bank in the country, behind only JPMorgan Chase in assets. You probably know it from its 4,200 bank branches across the country, third behind Wells Fargo and JPMorgan Chase. Or you may know it from your credit cards, as it is one of the largest credit card issuers in the country. It also provides wealth management for high-net-worth individuals, investment banking, and trading services for institutions. But most of its income comes from consumer banking.
While Bank of America, and the entire banking industry, took a hit in 2020 due to the pandemic and the resulting economic slowdown, it has been a consistent performer over the years. Over the past 10 years through March 31, the stock has had an annual return of about 12.8%, which beats both the financial sector and the S&P 500.
Bank of America's stock price was down about 11% in 2020 due in large part to the pandemic and its effects. There were fewer loans, thus less interest income, not to mention historically low interest rates. The bank also struggled because there were more loan defaults due to the pandemic, which caused it to set aside more money to cover potential losses. But the drop in stock price makes it a good value right now, as the economy recovers and there is pent-up demand for loans, investments, and mergers and acquisitions -- all services Bank of America provides.
The stock price is already up 27% year to date in 2021 and the stock price is low, roughly $38 per share, compared to its assets on the books, which means it should see continued growth.
It bodes well for Bank of America that it has ramped up its digital banking infrastructure and is the leader in this space with 39 million active digital banking customers, up 3%, and 31 million active mobile banking customers, up 6%, year over year. Digital banking is where the industry is headed, and Bank of America has been ahead of the trend -- and is determined to stay there.
As one of the largest banks in the world, Bank of America is not going anywhere except up, particularly as the economy improves and interest rates eventually rise.
2. Walt Disney: Find your happy place
Marketers at Disney World call it the "Happiest Place on Earth," for obvious reasons if you've ever been there, particularly with kids. But 2020 was one of the company's most difficult years ever, where it endured unprecedented challenges related to the pandemic. Its theme parks were completely shut down for several months, then some opened to limited capacity in the latter half of the year. Its movie production businesses, which include Disney, Marvel, Lucasfilm, Twentieth Century Studios, and Pixar, were all derailed by the pandemic as potential blockbuster films were shelved, scrapped, or run on less lucrative platforms. This resulted in a significant reduction in revenue -- down 22% year over year in its first fiscal quarter ended Jan. 2 -- and earnings per share, down 98% year over year.
But the challenges posed by the pandemic allowed Disney to develop its other muscles, mainly its Disney Media and Entertainment Distribution arm, which includes its television and direct-to-consumer or streaming properties, including ABC, ESPN, Hulu, and most notably Disney+.
The streaming businesses, led by Disney+, saw revenue climb 73% in the first fiscal quarter to $3.5 billion, which represents 21% of revenue. The TV networks, including ABC, ESPN, and others, also performed well, with revenue up 2% year over year to $7.7 billion. Overall, the media and entertainment business accounted for about three-quarters of Disney's revenue in the first quarter.
The Disney+ streaming service will continue to drive revenue growth for Disney as the company adds more and more content to the platform. Eventually, the theme parks and movie studio businesses will come back as well, as most of the adult population should be vaccinated by summer.
Disney found a way to evolve through the most difficult period in its history, but it remains a media and entertainment empire with some of the most enduring properties in the world. Like Bank of America, it survived the pandemic and should be a happy place for investors for a long time.
What Bank of America and Disney have in common is they are both stable, market-leading businesses that have stood the test of time by being able to evolve. New investors should consider them good foundational pieces in a portfolio.
