Equity markets are driven mostly by two sentiments -- greed and fear. Investors focusing on short-term gains have been known to chase over-hyped and mediocre stocks to irrational valuation levels and dump less-hyped quality stocks. However, this strategy comes with a boatload of volatility and is not suitable for retail investors. Investing in fundamentally strong stocks with a margin of safety is still the best way for investors to earn long-term returns.
Building wealth in the stock market is not as difficult as it seems -- $1,000 is more than enough to get you started. As long as you won't need this money to pay bills or for other contingencies, the following three companies can prove to be smart picks in the long run.
Leading sell-side advertising technology company Magnite (MGNI 1.75%) has lost almost 44% of its market capitalization since February 2021. The company helps web publishers and content producers sell their ad slots to interested advertisers. Investors, however, remain concerned about the company's future prospects in the face of Apple's move to allow users to block Identifier for Advertisers (IDFA) at the application level and Alphabet's plans to stop cookie tracking on its Chrome browser by 2023. This is understandable since advertising technology companies have long used third-party browser cookies for tracking user browsing behavior to shape advertising campaigns.
However, the intensity of Magnite's sell-off seems exaggerated. Currently, cookies are used for only 20% of data-driven advertising. Instead, Unified Id 2.0 -- an email-based identity solution supported by Magnite -- is becoming an alternative to third-party cookies.
Magnite also stands to benefit significantly from the structural trend of linear TV spend shifting toward ad-supported connected TV (CTV). The recently completed acquisition of sell-side advertising platform and major CTV player SpotX has made Magnite the largest independent publisher-side advertising technology company, supporting major cable networks and streaming platforms across the world. Emarketer estimates that CTV ad spending in the U.S. will grow year-over-year by 48.6% to $13.4 billion in 2021 and reach $24.76 billion in 2025. Magnite is an attractive bet on the strength of the overall CTV market, without the risks associated with the success or failure of any single streaming service. Additionally, CTV advertising does not rely on cookies and provides customized recommendations to users based on personalized logins.
With a market capitalization of $4.2 billion and trailing-12-month (TTM) revenue of $246 million, Magnite is still just a small player in the CTV space. However, at a TTM price-to-sales (P/S) multiple of 17.1 times, Magnite is reasonably priced, especially for a technology stock. Magnite's recent foray in the interactive CTV ad space in partnership with The Trade Desk and Innovid further improves the appeal of this stock as a solid long-term play in 2021.
2. Enterprise Product Partners
Midstream oil and gas player Enterprise Products Partners (EPD 1.09%) is well-positioned to benefit in a recovering economy -- especially since we may now be in a potential commodities supercycle. While global energy demand is expected to revert to pre-pandemic levels by the end of 2022, investments in oil and gas exploration have remained quite low since 2014. As oil and gas producers increase supply, we can expect higher fee income for master limited partnership (MLP) Enterprise Products Partners. The company currently operates over 50,000 miles of oil, petrochemical, natural gas, and natural gas liquid (NGL) pipelines, 14 billion cubic feet of natural gas storage capacity, and 21 NGL processing plants.
Precedence Research has estimated the global petrochemical market to grow at a compound annual growth rate (CAGR) of 5.1% from $453 billion in 2020 to $729 billion in 2030. This bodes well for Enterprise Products Partners, considering that NGL is the feedstock used for manufacturing petrochemicals. NGL accounted for half of the company's TTM gross margin of $8.4 billion.
Enterprise Products Partners is also a favorite of income investors due to its high yield of 7.6%. These payouts are well-supported by the company's solid balance sheet and robust cash flow. Fitch Ratings has affirmed BBB+ rating for the company. The company's debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) was 3.3 times for the 12 months ending March 31, 2021, well below the target of 3.5 times. Enterprise Products Partners' annualized distribution coverage (distributable cash flow divided by the total amount of payouts) in the first quarter (ending March 31, 2021) was 1.8 times, and 1.6 times in 2020, which was inarguably a very difficult time for the oil and gas industry. The company also has consistently raised its distributions for the past 22 years.
Enterprise Products Partners is currently trading at an enterprise value to EBITDA multiple of 11.32 times, which is slightly higher than the oil and gas industry median multiple of 10.12 times. While there are several pros to investing in Enterprise Products Partners, retail investors should remain aware of some of the taxation concerns posed by its MLP structure, especially for retirement accounts. If you are up for these challenges, then the company might prove to be a solid addition to your investment portfolio.
A third smart stock to buy with $1,000 is Vizio (VZIO 0.09%), which is essentially a stable and mature device company (selling smart televisions, soundbars, and accessories), but is rapidly increasing its exposure as a CTV advertising business.
In 2020, Vizio accounted for a 13% share of the U.S. smart TV market. Leveraging this broad installed base, the company introduced Platform+, which includes a smart TV operating system called SmartCast and a data analytics service called Inscape. This digital platform allows users to stream content from a range of publishers.
As users increasingly shift from linear TV to OTT, the $70 billion linear TV ad market will also start switching to streaming platforms. Riding on this secular tailwind, Vizio is targeting huge monetization opportunities in areas such as ad-supported video on demand (AVOD), home screen advertising, and partner marketing. The company aims for more interactivity in advertising solutions and better monetization for subscription services offered on its SmartCast platform. Vizio's strategic partnership with Verizon Communications is a move toward enabling new cross-platform and CTV advertising solutions, with the help of Inscape's smart TV data.
All these strategic moves are translating into robust financial numbers. In the first quarter (ending March 31, 2021), the company's net revenue was up 52% year-over-year to $506 million, while gross profits jumped by 82% year-over-year to $87 million. SmartCast active accounts rose 57% year-over-year to 13.4 million, while total hours spent on Vizio grew 42% year-over-year to 7 billion.
However, Vizio faces stiff competition in the devices market from peers such as Samsung and LG Display. This might be a challenge considering that devices currently account for almost 90% of the company's total revenue. Yet, the stock remains an attractive pick for its high-growth advertising business, especially when it is trading at only 1.85 times TTM sales. Against this backdrop, this may be a good time to load up on this cheap streaming play.