Stimulus checks are showing up in people's bank accounts and creating a big temptation for those with steady incomes and ample savings to spend the extra cash. Yet investors know that they can achieve bigger returns in the future by passing on the instant gratification of buying a new gadget or home upgrade.
But which stocks are worth that trade-off?
Investing preferences differ, and many stocks seem like a stretch following a huge market rally since the start of the pandemic. But you're likely to look back in a few years happy you spent your stimulus check on Home Depot (HD -0.31%), eBay (EBAY 0.31%), or Domino's Pizza (DPZ 1.45%).
Image source: Getty Images.
1. Home Depot
Home Depot shares have barely kept pace with the 60% stock market rally in the past year. Rival Lowe's (LOW -0.14%) more than doubled its share price in that time.
Sure, Lowe's is closing the growth gap with its competitor, boosting sales 24% in 2020 compared to the market leader's 20% increase. Wall Street is also excited about the prospect for rising profitability as Lowe's operating margin marches toward Home Depot's 14% from its current 11%.
But Home Depot looks like a winner at today's prices. The home improvement retailer added $22 billion to its annual sales base last year despite shorter store hours and efforts to limit customer traffic during virus outbreaks. The relaxation of those pressures, plus Home Depot's big push into the professional maintenance niche, should allow it to win back some of the momentum that Lowe's captured in 2020.
Meanwhile, investors get a dividend that yields 2% today compared to Lowe's 1.2%. They also can expect quicker income growth since Home Depot returns over half of its annual earnings to shareholders through dividends while Lowe's pays out just about 35%.
2. Domino's Pizza
This past year was better for Domino's Pizza than for the wider restaurant industry. The world's leading pizza giant posted 10% higher revenue, including a double-digit spike in comparable-store sales. Yet Domino's stock has become cheaper since early 2020 as Wall Street worried about mounting competition in the home delivery segment. That concern was amplified by news that rival Papa John's (PZZA -2.33%) won some business from the market leader.
I still think Domino's will trounce the stock market over the long term. The pizza specialist runs amazingly efficient stores that, thanks to their carryout and delivery focus, require lower volumes to generate cash. That fact protects investors from some major restaurant-industry risks like overbuilding.
But the bigger reason to like Domino's is its track record for market share gains. Five years ago, it accounted for 29 % of U.S. home pizza delivery while today it owns 37% of that huge and growing niche. It's no surprise, then, that annual sales are up over 80% in that time.
PZZA Revenue (TTM) data by YCharts. TTM = trailing 12 months.
Look for the pizza leader to continue that streak over the coming years, pulling investors' returns up as well.
3. eBay
By handling over $100 billion of annual merchandise volume, eBay sits near the top of global e-commerce companies in market share. But its stock hasn't received nearly the same attention as Wall Street darlings like Shopify (SHOP -2.37%) and Wayfair (W -3.72%). That might change soon.
eBay's fiscal 2020 benefited from the same incredibly favorable demand trends that pushed sales higher for those other industry players. Sales jumped 20% even though management entered the year predicting near flat results. Yet eBay has some unique advantages over peers, including an asset-light selling model that routinely allows cash flow to cross 20% of sales a year. It produced $2.6 billion in free cash last year compared to $10.3 billion of revenue .
eBay is directing some of that windfall toward securing its bigger sales base in 2021. But there should be plenty left over for stock buybacks and dividend payments, both of which should amplify investors' returns. After a few years of compounding, these gains could easily dwarf your stimulus check.
