There are a lot of ways for American workers to build wealth. They can shuffle money under the mattress, buy bank certificates of deposit (CD) or bonds, or purchase a house and cross their fingers that it appreciates at a faster pace than the prevailing rate of inflation. But over the long run, no investment vehicle has delivered a higher annualized return than stocks.
If you invest in great companies and allow your investment thesis to play out over many years, if not decades, stocks have the power to make the American worker rich.
Understandably, there's no singular definition to being rich. For some people, that might mean buying their dream car or owning a boat. For others, "rich" could mean the added value of spending more time with family or not having to worry about paying their monthly bills.
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By the time working Americans hit retirement, the following five winning stocks have the potential to make them rich.
Berkshire Hathaway
Sometimes, the best long-term investments are boring. That's the case with Berkshire Hathaway (BRK.A 0.68%)(BRK.B 0.53%), the conglomerate that's been run by billionaire Warren Buffett since 1965. In Buffett's more than five decades at the helm, he's created over $500 billion in value for Berkshire Hathaway's shareholders and overseen an annual average return of 20%. In aggregate, we're talking about a return of closer to 3,400,000% for the Class A shares (BRK.A), taking into account year-to-date gains.
One of the reasons Berkshire is such a successful company is its cyclical ties. A majority of the company's nearly $323 billion investment portfolio is tied up in technology, financials, and consumer staples. These are sectors that perform really well when the U.S. and global economy are firing on all cylinders. Even though recessions are an inevitable part of the economic cycle, Buffett is keenly aware that periods of expansion last considerably longer than periods of contraction. In other words, the Oracle of Omaha is simply playing the odds.
The other key to Berkshire's superior returns is its dividend stock ties. While Berkshire doesn't pay a dividend, quite a few of the companies it's invested in do. All told, my back-of-the-envelope calculation has Berkshire netting around $5.1 billion in dividend income this year. Based on its initial cost basis, this works out to a roughly 5% yield, which is insanely good, and points to the company's likelihood of being wildly successful for many years to come.
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Intuitive Surgical
Businesses that have clearly identifiable and sustainable competitive advantages are also a smart place to put money to work. Surgical-assisted robotic systems developer Intuitive Surgical (ISRG 0.69%) is a perfect example of a company with a dominant presence that can make American workers rich.
When the first half of 2021 came to a close, Intuitive Surgical had 6,335 of its da Vinci surgical systems installed worldwide (although most are in the United States.). You could add up all of the company's competitors, and you still wouldn't come close to the number of surgical systems Intuitive has installed. Between the high cost of these systems ($0.5 million to $2.5 million), the training provided to surgeons, and the rapport built up over the past 20 years, Intuitive Surgical is effectively locking in its clients for a long time.
More importantly, Intuitive Surgical is designed to improve its operating margins over time. This is a fancy way of saying that earnings growth can outpace sales growth for years, if not decades, to come.
Initially, selling its da Vinci systems made up the bulk of the company's revenue. But these are intricate systems to build, which meant margins weren't all that great. As time has passed, most of Intuitive's sales are now derived from instruments sold with each procedure and the servicing of its systems. These are higher-margin categories and the company's ticket to a growing bottom line.
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Square
If you want unbridled innovation, look no further than fintech stock Square (SQ +3.61%). Despite its huge run since the pandemic low in March 2020, it has all the tools needed to eventually become a $1 trillion company.
Square's foundational segment continues to be its seller ecosystem. This is what provides point-of-sale devices, analytics, loans, and other tools to help merchants successfully grow their business. In the seven years leading up to the pandemic, gross payment volume (GPV) catapulted from $6.5 billion to $106.2 billion. This year, GPV should easily clear $140 billion.
Something interesting to note about the seller ecosystem is that it's not just for small merchants any longer. In the June-ended quarter, 65% of all GPV derived from sellers with at least $125,000 in annualized GPV. That's up 10 percentage points from the comparable period in 2019. Since this is a merchant fee-driven segment, bigger merchants mean more gross profit.
However, all eyes are on digital peer-to-peer payment platform Cash App, which more than quintupled its monthly active user count in three years. Cash App broadens Square's ability to generate revenue, and it brought in $55 in gross profit per user in the second quarter, compared to an acquisition cost per user of only around $5. These insane margins should power Square's valuation a lot higher.
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Another winning stock with the potential to make American workers rich by retirement is social media up-and-comer Pinterest (PINS +2.58%).
Though a lot of emphasis has been placed on Pinterest's monthly active user (MAU) retracement in the second quarter, this near-term blip overlooks some very core and positive trends. For instance, user growth regressed in Q2 2021, but it remains well within historic norms, if examined over a three-year period.
What's far more important is that Pinterest's average revenue per user (ARPU) continues to soar. Despite the sequential quarterly MAU retracement in Q2, global ARPU rose 89% year over year, with international ARPU up an even more impressive 163%. What this tells us is that merchants are willing to pay up to reach Pinterest's MAU base of 454 million people. That's a lot of potentially motivated people, and merchants know it.
Ultimately, Pinterest is still in the early innings of monetizing what could become a top e-commerce platform. Whereas most social media requires advertisers to somewhat guess about the interests of users, Pinterest's MAUs are willingly sharing the places, services, and things that interest them. All Pinterest has to do is keep users engaged for its middleman e-commerce platform to work its magic.
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Salesforce
A fifth and final winning stock that can help working Americans retire rich and on their own terms is cloud-based customer relationship management (CRM) software provider Salesforce.com (CRM +2.27%).
In simple terms, consumer-facing businesses use CRM software to enhance customer relationships and improve sales. Aside from accessing and logging real-time client info, CRM software is used to manage online marketing campaigns, handle service issues, and run predictive analyses on a company's existing client base.
If you're wondering where Salesforce fits into the CRM space, it's the clear-cut alpha. In the first half of 2020, IDC found that practically $0.20 of every $1 spent globally on CRM was through Salesforce. The company's four largest competitors don't even add up to Salesforce's market share in the CRM space. Translation: The company's position as an industry leader is very secure.
Salesforce CEO Marc Benioff has also done an exemplary job of expanding via acquisition. The purchases of MuleSoft, Tableau, and, more recently, Slack Technologies have helped to expand its customer-centric ecosystem and appeal to a larger swath of small and medium-sized businesses. With Benioff calling for $50 billion in annual sales by fiscal 2026 (Salesforce reported $21.3 billion in sales in fiscal 2021), it's a good bet to outperform for investors.
