It's a confusing time to be a new investor. The financial media seems obsessed with SPACs, cryptocurrencies, NFTs, and other speculative investments, while rising bond yields are sparking a messy rotation from growth stocks to value stocks. Stocks that generated massive returns throughout the pandemic are also losing their luster as investors focus on rising vaccination rates.
However, many of the market's best investments are hidden in plain sight. Today I'll highlight three of those stocks -- Apple (AAPL 0.31%), Texas Instruments (TXN -0.32%), and Costco (COST 0.83%) -- and explain why they're still rock-solid investments for new investors.
Apple is one of the world's most valuable and beloved brands. Its iPhones dominate the high-end smartphone market, and its prisoner-taking ecosystem of services surpassed 600 million paid subscribers last quarter.
The iPhone 12, Apple's first family of 5G devices, could spark a fresh wave of upgrades this year and generate the company's highest iPhone shipments since 2016. Over the next few years, new versions of the Mac, iPad, Watch, and AirPods should lock in more users as Apple develops next-gen devices like augmented reality glasses and electric cars.
Apple's heavy dependence on the iPhone, which generated half its revenue last year, might seem risky. However, Apple's sticky services segment is growing rapidly, it's launching a wider range of iPhone models for mid-range users, and it's still sitting on nearly $196 billion in cash and marketable securities, which gives it plenty of room to expand with fresh investments and acquisitions.
Apple consistently spends its cash on buybacks and dividends. Over the past 12 months, it bought back $75.6 billion in shares and paid out $14.2 billion in dividends. It spent just 18% of its free cash flow (FCF) on its dividend during that period, so it still has plenty of room to raise its forward yield of 0.7%.
Analysts expect Apple's revenue and earnings to grow 22% and 36%, respectively, this year. Those are impressive growth rates for a stock that trades at just 26 times forward earnings, and indicate it still isn't too late for new investors to profit from Apple's ongoing growth.
2. Texas Instruments
Texas Instruments is one of the safest and most shareholder-friendly semiconductor stocks for new investors. It mainly produces analog and embedded chips, which don't cost as much to manufacture as more advanced chips, for a wide range of industries.
TI reduced its production costs by about 40% over the past few years by shifting from 200mm to 300mm wafers. Those savings enabled it to grow its FCF per share at an average annual rate of 12% between 2004 and 2020, and it spent most of that cash on buybacks and dividends.
TI reduced its outstanding share count by 45% between 2004 and 2020 and raised its dividend every year throughout those 17 years. It currently pays a forward yield of 2.2%.
TI struggled last year as the pandemic disrupted the auto and industrial markets, which accounted for over half of its revenue. But most of those headwinds dissipated in the second half of the year, and analysts expect its revenue and earnings to improve 15% and 16%, respectively, this year.
TI's stock seems pricier than Apple's, but its well-diversified business, low-cost business model, and shareholder-friendly measures all justify that slight premium.
Costco survived the retail apocalypse for three simple reasons. First, it locked in customers with membership subscriptions. Second, it sold most of its products in bulk and at lower prices than Amazon. Lastly, it continued to open new warehouses as other brick-and-mortar stores retreated.
Costco generates nearly all of its profits from membership fees, which enables it to sell its products at paper-thin margins or losses. Its global membership renewal rate rose ten basis points year-over-year to 88.5% last quarter, while its renewal rate in the U.S. and Canada increased from 90.9% to 91%.
Costco was already growing at a healthy clip prior to the pandemic, but its sales accelerated significantly throughout the crisis as shoppers stocked up on essential products. As a result, the company will face tough year-over-year comparisons after the pandemic ends.
However, analysts still expect Costco's revenue and earnings to rise 12% and 14%, respectively, this year. Costco consistently repurchases its own shares, but it usually prioritizes its dividend payments over those buybacks. It pays a forward yield of 0.8%, but that dividend probably won't win over many income investors as bond yields rise.
Costco's stock might seem pricey at 32 times forward earnings, but its dominance of the warehouse retailing space, sticky subscription model, and ongoing expansion in the U.S. and overseas all make it an evergreen investment in the fickle retail sector.