Equity benchmark indices in the U.S. have reported a mixed performance in June 2021. While the S&P 500 and Nasdaq gained 2.1% and 6.5%, respectively, in the last month, the Dow Jones Industrial Average was down by a modest 0.6%. However, the future movement of the stock market will most likely be determined by the June monthly jobs report.
Despite this headline risk, long-term investors can earn handsome returns by investing in fundamentally strong stocks that are poised to benefit from structural tailwinds. This is possible even if you have disposable capital as low as $2,000, which is not needed to pay bills or for other contingencies. If that's the case, long-term investments in the following stocks can help investors pave their way to financial independence.
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1. The Trade Desk
Shares of the demand-side advertising technology company, The Trade Desk (TTD 0.85%), have rallied by around 30% in the past month. Recently, Alphabet (GOOG 0.37%) (GOOGL 0.35%) subsidiary Google announced plans to push back the phasing out of third-party cookies to 2023. This move has given advertising-technology companies additional time to develop alternative technology for targeted advertising. The company's stock also jumped after its 10-for-1 split due to expectations of a surge in retail and institutional volume.
While cookies play a major role in targeted advertising on internet browsers, they account for only 20% of the overall data-driven advertisements. The Trade Desk has also built Unified ID 2.0 (an alternative login technology), which allows customers the choice of whether or not to share data with individual applications. This technology is rapidly gaining support as an alternative to cookies for data-driven advertising on the open internet.
Additionally, connected TV (CTV), which is unquestionably one of the biggest trends in the programmatic advertising space, does not depend on cookies to target customers. Instead, it establishes identity through personalized logins. Emarketer expects U.S. programmatic CTV video-ad spending to grow from $4.36 billion in 2020 to $8.67 billion in 2022. TTD sees CTV programmatic ad buying, especially in the ad-supported, video-on-demand (VOD) space as a major driver for its growth. The company is witnessing faster CTV momentum in international markets than in North America.
In the first quarter (ending March 31, 2021), the company's revenues and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soared year over year by 37% and 32%, respectively. The company is cash flow positive. So, although the company's 40 times trailing 12-month price-to-sales (P/S) multiple seems high, I think it is justified by the company's solid fundamentals and robust financials.
2. Perion Network
Perion Network (PERI -2.92%) is another company well positioned to benefit from the expected expansion of digital advertising's total addressable market (TAM) from $339.71 billion in 2020 to $542.34 billion in 2024. The company provides artificial intelligence and machine learning-based advertising solutions in areas such as social media, search, and CTV advertising. The company also stands to benefit from increased ad spending associated with the recovery of pandemic-affected travel and entertainment sectors.
Although far smaller than other digital-advertising players such as The Trade Desk and Magnite (MGNI 0.70%), Perion Network differentiates itself based on robust profitability and a solid balance sheet. At the end of Q1, the company was debt free and carried $128 million in cash on its balance sheet. The company is also confident that Google's lowered use of cookies will have a negative top-line impact of only around $10 million, or 3% of its annual revenues.
In Q1, Perion Network's revenues rose by 36% year over year to $89.8 million, while adjusted EBITDA was up 41% year over year to $8.8 million. Emarketer expects the CTV user base and ad spend in the U.S. to reach 213.7 million and $13.21 billion, respectively, in 2021. The U.S. search ad spending is also expected to grow from $58.02 billion in 2020 to $66.2 billion in 2021. Thanks to these secular tailwinds, the company has already raised its fiscal 2021 guidance three times this year.
Perion Network earns more than half of its total revenues from its strategic relationship with Microsoft's (MSFT -1.84%) Bing, which exposes the company to excessive business-concentration risk. Despite this concern, considering the robust secular tailwinds, diversified revenue base, healthy balance sheet, and cheap 1.7 times trailing 12-month P/S multiple, Perion Network can prove to be an attractive addition to a retail investor's portfolio.
3. Enbridge
Midstream Oil and gas player, Enbridge (ENB 1.71%), transports 25% of crude oil produced in North America and 20% of the natural gas consumed in the U.S. The company is benefiting from the spike in global oil prices, which has been driven by increasing demand in a recovering global economy and limited supply by the Organization of the Petroleum Exporting Countries (OPEC). While global oil demand is expected to reach pre-pandemic levels by the end of 2022, capital expenditure (CapEx) investments in oil and gas exploration have not kept pace. This supply demand mismatch can result in a prolonged period of elevated oil prices, which in turn encourages existing oil and gas producers to increase capacity. This means more business for Enbridge's pipeline network.
In 2020, oil and gas transmission businesses contributed almost 83% of Enbridge's adjusted EBITDA. Gas distribution and renewable energy contributed 14% and 3% of adjusted EBITDA, respectively. In addition to a diversified revenue base, the company also has a stable client base consisting of over 95% investment-grade customers. Since 98% of the company's cash flows originate from long-term contracts, Enbridge can count on high cash flow predictability and visibility.
Enbridge is highly sought by income investors for its 6.4% dividend yield and commitment to increasing dividends for the past 26 years annually at a compound annual growth rate (CAGR) of 10%. In Q1, the company had a payout ratio of 60.94% based on distributable cash flow. This, coupled with a BBB+ rated balance sheet ensures flexibility for the company to continue with its payouts in coming years.
Enbridge is currently trading at an enterprise value-to-EBITDA multiple of 12.4, which is more than the oil and gas industry median of 10.1. The company has also planned a massive capital spending of $17 billion from 2021 to 2023, the benefits of which are yet to be seen.
Finally, the possibility of the potential shutdown of the Line 5 pipeline, although a low probability risk, should also be taken into account. Despite these cons, Enbridge offers a favorable risk-reward proposition to retail investors due to its solid dividend payout, robust business model, and reliable client base.
