The turnaround we've witnessed over the past 13 months can best be described as amazing. Following the quickest bear market decline of at least 30% in the S&P 500's history, the benchmark index has responded by gaining 87% since hitting a bear market bottom on March 23, 2020. That's a record-breaking bounce back.
The thing is, there are always deals to be found in the stock market if you're willing to do some digging and hang onto your investments for long periods of time. What's more, you don't need to have millions of dollars to build wealth on Wall Street. If you have $500 that won't be needed to pay bills or cover emergencies, you have more than enough to buy three of the smartest stocks right now.
Square is comprised of two fast-growing operating segments. The more mature of the two is the seller ecosystem.
If you've ever visited a small businesses or purchased from a kiosk in the middle of a mall, there's a good chance you've used one of Square's point-of-sale devices. It provides these devices, along with loans, analytics, and other tools to its merchants, to help them facilitate payments and grow. In the seven years leading up to the pandemic, the seller ecosystem's gross payment volume (GPV) surged by an annualized average of 49%. Last year, GPV inched higher to $112.3 billion.
What's noteworthy about the seller ecosystem is that we're seeing larger businesses latch on. Two years ago, Square generated 52% of its GPV from merchants with at least $125,000 in annualized GPV. By the fourth quarter of 2020, this figure had risen to 60%.
It's not clear if this is a function of Square attracting new businesses or if existing merchants are growing into larger players (or perhaps both). What is clear is that a merchant fee-driven model like the seller ecosystem benefits when bigger businesses are taking payments using its network.
The second operating segment, and the one generating much more hoopla, is peer-to-peer digital payments platform Cash App. In three years, Cash App's monthly active user (MAU) count has more than quintupled to 36 million. The company is able to generate multiple channels of revenue via Cash App, including merchant sales, bank transfer fees, investment fees, and Bitcoin exchange. In fact, the latter saw a ninefold revenue increase in 2020 to $4.57 billion.
The number that should have investors salivating is the $41 in gross profit Cash App is generating per MAU, compared to the under $5 spent in acquiring each new MAU. That's an insane margin that's going to quickly make Cash App Square's leading profit driver.
Another extremely smart stock you can buy right now with $500 is esports and gaming up-and-comer Skillz (SKLZ 7.34%).
Without beating around the bush, the gaming industry is highly competitive, so it's difficult to consistently develop games that users are willing to play and pay for. Skillz knows this, which is why it decided not to go toe-to-toe with the gaming industry's giants.
Instead, it's developed a gaming platform that allows users to compete against each other for cash and prizes. The catch? Skillz and gaming developers get to keep a cut of the cash for themselves. This relatively genius and low-cost gaming approach has led to back-to-back years of a 95% gross margin.
To be successful in the gaming industry, companies also need to land major partnerships. In the first week of February, Skillz signed a multiyear agreement with the National Football League (NFL). This deal will allow developers to create NFL-themed games that'll be launched on Skillz's platform either later this year or in 2022. Football is the most-watched sport in the U.S. by a longshot, which should give Skillz incredible momentum with millennials, Generation Z, and possibly even Gen X.
Because Skillz is still so early in its growth process, investors are likely to see rapid sales growth continue through mid-decade. Wall Street believes Skillz can expand its top line by 60% in 2021 and quadruple its revenue to around $951 million by 2024.
Skillz is a disruptor that should handsomely reward patient investors.
Berkshire Hathaway (B Shares)
For you value-oriented investors with $500, I'd suggest putting that money to work in conglomerate Berkshire Hathaway (BRK.A 1.66%) (BRK.B 1.71%). I'd specifically point you to the Class B shares (BRK.B), since the price tag for a Class A share is almost $409,000.
If the Berkshire Hathaway name doesn't ring a bell, this might: Its CEO is Warren Buffett, one of the greatest investors of our generation. Since 1965, Berkshire Hathaway's stock has averaged... averaged... an annual return of 20% on the nose. This works out to an aggregate gain in a little over 5 1/2 decades of 2,810,526%, which compares to a 23,454% total return for the S&P 500 over the same time frame.
One of the reasons Buffett's portfolio has been so successful throughout the years is that it's predominantly cyclical. The lion's share of Berkshire's capital is tied up in tech stocks, bank stocks, and consumer staples (i.e., industries or sectors that do really well when the U.S. and global economy are firing on all cylinders). Even though recessions and contractions are a normal part of the economic cycle, periods of expansion tend to last years. Buffett has positioned his portfolio to navigate its way through these short-term rough patches in order to take advantage of these multiyear expansions.
Warren Buffett has also packed Berkshire Hathaway's portfolio with companies that offer durable competitive advantages. For example, Coca-Cola (KO 0.76%), the Oracle of Omaha's longest-tenured holding at 33 years, controls 20% of developed market cold beverage share, 10% of cold beverage share in emerging markets, and generates revenue from all but two countries worldwide (Cuba and North Korea). Coke may not be the growth story it once was, but with a cost basis of $3.25 a share, Berkshire Hathaway is netting a 52% dividend yield based on cost every year.
Riding Buffett's coattails has historically never been a bad idea.