Beginning investors interested in individual stocks face the daunting challenge of not only having to understand the many factors that contribute to a stock's performance, but also having to choose from the thousands of stocks currently trading. As an alternative, many turn to index funds such as the SPDR S&P 500 ETF Trust or target funds that mix stocks and bonds that at least provide some diversity for their portfolios.
New investors may still want to better understand individual stocks, though, and seek out stocks that offer growth potential but are still simple to understand. Investors who choose beginner stocks like Amazon (AMZN -3.03%), Innovative Industrial Properties (IIP) (IIPR -5.13%), and PayPal (PYPL -1.89%) get this growth/comprehensibility combination as well as the ability to diversify holdings across multiple industries. Let's take a closer look.
Amazon can serve new investors well since it offers both familiarity and growth potential. As the leading e-commerce company, Amazon has become well-known for its website that appears to offer everything. So successful is this retail operation that it could surpass Walmart in total annual sales in the next couple of years if current patterns hold.
What new investors may not know is that Amazon also pioneered the cloud computing industry with Amazon Web Services (AWS). AWS gives investors an additional source of revenue, and it also insulates stockholders from the ultra-low profit margins that characterize the retail industry.
In the first six months of 2021, those multiple revenue sources brought in sales of $222 billion, a surge of 35% compared with the first half of 2020. Net income of almost $16 billion more than doubled during that timeframe as equity gains from outside investments boosted income.
Admittedly, the stock price has been effectively flat in 2021, well below the approximate 26.5% compound annual growth rate (CAGR) of the last seven years. This recent performance has much to do with concerns that offline reopenings related to the pandemic would slow e-commerce growth. Nonetheless, the stock's performance has brought its price-to-earnings (P/E) ratio down to 57, a relatively reasonable level when you consider the rapid growth of both its e-commerce operations and AWS. As economic activity returns to pre-pandemic levels, the stock should remain a top stock to buy.
2. Innovative Industrial Properties
Admittedly, new investors may not be familiar IIP. A closer look should give them an introduction to a class of stocks called real estate investment trusts (REITs). These stocks generate income through the management of properties and/or mortgages. The tax structure of their businesses requires that they payout at least 90% of their net income in the form of dividends to shareholders.
Rather than offices, retail locations, or apartments, IIP focuses its property management on greenhouses and land suited for the cultivation of cannabis. In some cases, it buys property from cannabis producers to provide them with needed capital and then profits by leasing those properties back to the former owners. This gives investors cash flow from the lease arrangement, and it also offers a potentially safer option to profit from the fast-growing cannabis industry.
Rapid increases have come to define IIP's financials. In the first half of 2021, IIP reported revenue of $92 million, 102% higher than the same period in 2020. Net income over that timeframe also surged 123% to $55 million. Operating expenses grew at 64% year over year, while interest costs climbed 50%. Since these expenses increased more slowly than revenue, IIP could increase its profits at a faster rate.
These profits also boosted the dividend for a sixth consecutive quarter. The $6 per share annual payout gives investors a dividend yield of 2.6%. With the stock's price rising by more than 85% over the last 12 months, new investors can capitalize on a rapidly growing business while also experiencing dividend growth firsthand.
3. PayPal Holdings
Society has become increasingly cashless, and one of the more familiar names on the technology side of this finance trend is PayPal. The fintech company made a name for itself in the 1990s by enabling payments over one's PC in the U.S. It has expanded its services since then and also expanded to offer those services in more than 200 countries.
It began its stint as a subsidiary of eBay, but was split off into its own public entity in 2015. That split allowed it to greatly expand its influence. Its list of services now includes peer-to-peer payments through its Venmo site and offering consumers buy-now, pay-later options.
PayPal faces increased competition from Square in the areas mentioned above, and from companies like MercadoLibre that provide fintech products that can serve customers who hold neither credit nor debit cards. However, Grand View Research forecasts a CAGR of 19% through 2028, taking the fintech industry's size to $236 billion and increasing the likelihood that PayPal's expansion will continue for some time.
During the first half of 2021, revenue topping $12 billion surged 24% compared with the first six months of 2020. Net income climbed 43% year over year to $2.3 billion during this period. Since operating expenses increased by only 18%, it more than offset the income tax expense and the lower levels of income from equity gains.
This growth helped the stock price to rise by nearly 35% over the last 12 months. The P/E ratio of 65 also comes in far below Square's earnings multiple of about 210. As fintech plays an increasingly important role in spending, the PayPal growth story will likely serve new investors well for some time to come.