The meme stocks GameStop (GME 2.56%) and AMC Entertainment Holdings (AMC) have gained roughly 4,040% and 930%, respectively, in the past year on the strength of social media frenzy. While these spectacular returns far outweigh the S&P 500's modest gain of 35% in the same time frame, they also come with a boatload of volatility. Hence, for a retail investor with an average risk appetite, nothing beats the conventional wisdom for long-term wealth generation: Invest in fundamentally solid stocks riding strong tailwinds.
You don't need massive amounts of money to take the first step toward building wealth in the stock market and achieving financial independence. If you have $700 that won't be needed to pay bills, the following three companies can be smart picks in the long run.
Image Source: Getty Images
1. Skillz
Although mobile esports company Skillz (SKLZ -0.95%) recovered some of its share price losses in early June, the stock is more than 55% below the all-time highs it reached in February. Investors remain worried about the company's excessive share dilution (which also involved significant insider selling) and several adverse short-seller reports. But this pullback in share price has opened an attractive entry point for retail investors.
Skillz still has solid growth prospects. In the first quarter of fiscal 2021 (ending March 31), revenue grew 92% year over year, while gross margins were 95%. Although the company reported a first-quarter net loss of $53.6 million mainly due to higher selling and marketing expenses, this is normal for a high-growth tech company in its early stages.
Skillz is also investing in gaming technology that allows players to participate simultaneously, which will allow the company to transition from simple multiplayer turn-based games to more engaging (and profitable) high-end multiplayer games involving first-person shooters and real-time strategy.
The acquisition of demand-side advertising platform Aarki for $150 million is expected to reduce Skillz's customer-acquisition expenses. While the company currently depends on third-party advertising partners, Aarki will help reduce much of these marketing expenses. To date, Skillz's revenue has stemmed mainly from users paying to participate in esports. While paying users grew by 81% year over year to 467,000 in the first quarter, they still accounted for only 17% of the company's total monthly active users. The acquisition of Aarki will enable Skillz to monetize its much larger nonpaying user base.
So although Skillz is currently trading at a rich price-to-sales (P/S) multiple of 27.6 on a trailing-12-month basis, this fast-evolving company still makes sense for retail investors looking to earn attractive returns in the coming months.
2. ClearPoint Neuro
ClearPoint Neuro (CLPT -0.19%) produces a navigation system guided by magnetic resonance imaging (MRI) that provides real-time imaging in neurosurgical procedures. Although MRIs offer superior visualization of the intricate structures of the brain compared with an X-ray or CT scan, they cannot be used with hard metal or metal devices. So ClearPoint offers an MRI-compliant system (i.e., made of plastic, ceramics, and MRI-visible fluids) to enable surgeons to perform procedures.
It also provides services and disposables used to deliver gene therapies to targeted locations in the brain in clinical trials for a range of neurological conditions such as Parkinson's disease and glioblastoma. The company estimates its total addressable market opportunity to be over $1 billion. ClearPoint is the only company offering real-time MRI imaging capabilities for neurosurgery and a means to deliver gene therapy to the brain, so it is not surprising that the stock has already gained nearly 390% over the past 12 months.
The pandemic-related suspension of clinical trials and deferment of elective procedures had a negative effect on ClearPoint in 2020. But with elective procedures returning in hospitals in the first quarter (ending March 31), revenue soared year over year by 29% to $4 million. This was driven by increased demand for its neuro navigation system and MRI-guided drug delivery products. At end of the first quarter, the company carried cash of $64.9 million and total debt of $27.3 million on its balance sheet.
At nearly 23 times trailing-12-month sales, ClearPoint is not cheap, especially considering that it still isn't profitable. However, the company gets more than 85% of its revenue from single-use disposables and services sold to hospitals and pharmaceutical partners (the rest is from the installation of computer workstations), giving it a razor-and-blades business model with significant revenue visibility.
Couple this with the game-changing potential of its technology in neurosurgery and neurological gene-therapy trials, and you have an attractive pick for retail investors even at elevated price levels.
3. Global Ship Lease
The stock price of container-ship owner Global Ship Lease (GSL 0.36%) has gained more than 370% in the past year and is up 76% so far in 2021. The company has benefited dramatically from the supply and-demand mismatch in global shipping.
The pandemic-driven increase in e-commerce, stimulus payments that pushed up consumer demand, and inventory-building by businesses ahead of the next pandemic wave pushed up demand for manufactured consumer goods. Since most of these products are transported on container ships, this led to a dramatic rise in freight rates. And with global volumes expected to rise by 6.8% year over year in 2021 and 5.9% in 2022 -- significantly ahead of the growth in available container capacity -- these elevated freight rates will persist for several months.
Global Ship Lease is in an especially sweet spot with its focus on midsize and smaller container ships, where capacity is expected to remain tight until 2022. Unlike bigger container ships, which are deployed on major trade routes between continents, Global's ships can be used on any route.
The company is also increasing its fleet capacity by purchasing existing ships with attached charters (contracts with cargo owners to move goods), instead of building new ones. This strategy has enabled Global to rapidly make its new assets remunerative.
These solid tailwinds were reflected in results for the first quarter (ending March 31). Operating income was up 48.4% year over year to $30.3 million, while net income soared 569.7% to $4.2 million. The company has also refinanced $330.6 million of fiscal 2022 debt, pushing the maturity to 2026.
Despite these positives, the stock trades at a trailing-12-month P/S multiple of only 2.6. While risks such as disruption of port services, delayed deliveries associated with a spike in COVID infections, and the International Maritime Organization's goal to reduce carbon dioxide emissions cannot be ignored, Global Ship Lease still offers an attractive risk-reward proposition.
