During the first quarter of 2020, investors were taken on an historic ride. The unprecedented nature of the global coronavirus pandemic sent the broad-based S&P 500 lower by 34% in roughly a month.
But as has been the case with every single crash or correction throughout history, patience paid off for long-term investors. In the more than 15 months since hitting the bottom, the S&P 500 has bounced 95%.
Some investors might be a bit apprehensive about buying stocks with the market at or very close to an all-time high. But history is pretty clear that if you have a long-term investing horizon, there's no bad time to put your money to work.
You also don't need to start with a fortune to make one on Wall Street. If you have $5,000 ready to be invested that you won't need to cover bills or emergencies, this is more than enough to buy the following trio of no-brainer stocks.
When I say "no-brainer stocks," I'm talking about businesses that have such plain-as-day competitive advantages and growth prospects that patient investors appear destined to build wealth with them. A perfect example of a stock that appears pricey now but will likely look inexpensive a few years from now, is fintech stock Square (NYSE:SQ).
The Square growth story began about a decade ago with its seller ecosystem. This is the company's operating segment that provides point-of-sale devices, loans, analytics, and other tools to merchants to help them succeed. Since it's predominantly a merchant-fee-driven model, Square's gross profit rises as gross payment volume (GPV) on its network climbs.
In the seven years leading up to the pandemic, Square's GPV grew from $6.5 billion to $106.2 billion, which works out to a compound annual growth rate of 49%. Based on the company's first-quarter operating results, GPV looks to easily top $130 billion in 2021 -- and this figure is with some states still implementing strict coronavirus-deterrent measures that adversely impacted businesses during Q1.
What's interesting is that the seller ecosystem was initially designed for small merchants, but the company's operating performance has shown that 61% of GPV in Q1 2021 derived from medium- and large-sized businesses, with at least $125,000 in annualized GPV.
However, the bigger growth driver for Square, which is expected to produce the bulk of its gross profit, is peer-to-peer digital platform Cash App. For the past couple of years, new downloads of Cash App have outpaced PayPayl's Venmo, with monthly active users for Cash App more than quintupling to 36 million since the end of 2017.
Cash App gives Square an opportunity to capitalize on growth in a number of areas. In addition to collecting merchant fees, Cash App generates revenue from bank transfers and investing fees. The latter also includes Bitcoin exchange, which generated Square almost $4.6 billion in sales last year. Cash App's juicy margins are investors' ticket to riches.
Innovative Industrial Properties
Another no-brainer investment opportunity can be found in the cannabis space. While there are no shortage of multistate operators (MSOs) that appear to have bright futures, perhaps the most surefire moneymaker is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR).
Like virtually all REITs, Innovative Industrial Properties, also known as IIP, aims to acquire properties that it can then lease out for extended periods of time. Even though acquiring new assets leads to the bulk of its revenue and profit growth, IIP has an organic growth aspect built into its operating model. It passes along 3.25% annual rental increases during the term of its leases, as well as collects a 1.5% property management fee that's based on the annual base rental rate.
As of early July, IIP owned 72 properties covering 6.6 million square feet of rentable space in 18 legalized states. The most important figure here is that 100% of these properties are leased, with a weighted-average lease length of 16.7 years. Although IIP stopped reporting its average yield on invested capital more than a year ago, it was on track for a complete payback of its invested capital in roughly six years. This implies a highly predictable and profitable operating model.
The U.S. federal government's inability to pass cannabis-reform measures is yet another reason IIP can continue to outperform. As long as pot is illegal at the federal level, marijuana stocks could struggle to gain access to basic banking services.
IIP attempts to resolve a big issue (access to capital) via its sale-leaseback program. Under this arrangement, IIP acquires medical-marijuana production or cultivation facilities for cash. This nets MSOs the capital they sorely need while landing IIP long-term tenants.
And in case I haven't mentioned it, since Innovative Industrial Properties is a REIT (and avoids normal corporate income tax rates), it pays out nearly all of its profits as a dividend to shareholders. The current base annual payout of $5.60 works out to a 2.8% yield, which is about double the yield you'd receive for owning an S&P 500-tracking index.
A third no-brainer stock that would be the perfect place to put $5,000 to work right now is Amazon (NASDAQ:AMZN). While I'm well aware that I've been pounding the table on Amazon for months, it's because the company has clear-cut competitive advantages in two arenas.
To start with, Amazon is the undisputed king of the hill when it comes to online retail. When eMarketer issued its most recent report in late April, it estimated Amazon would slightly top a 40% share of U.S. online sales in 2021. The next-closest competitor is Walmart, more than 33 percentage points lower (an estimated 7.1%).
Admittedly, retail isn't exactly a high-margin business. But Amazon has been able to counter the generally low margins that accompany retail sales by pushing Prime memberships. By having signed up more than 200 million people worldwide, the company can collect billions in fees that help to buoy retail margins and Amazon's ability to undercut brick-and-mortar retailers on price.
Amazon is equally impressive with its other endeavor, Amazon Web Services (AWS). AWS is the company's cloud-infrastructure services platform that held nearly a third of global cloud-infrastructure spending share in the first quarter, according to estimates from Canalys. We still appear to be in the very early innings of cloud-infrastructure growth.
The thing investors should realize about AWS is that margins are light years ahead of Amazon's other operating segments. Even though AWS makes up around an eighth of total sales, it's consistently generating a majority of Amazon's operating income. Over time, as AWS becomes a larger percentage of total sales, it'll have a disproportionately positive impact on operating cash flow growth.
Nominally, Amazon probably doesn't look "cheap" at $3,719 a share, as of this past weekend. But relative to Wall Street's cash flow expectations for 2024/2025, Amazon is an incredible value.