Whether you are looking for portfolio ideas or are a new investor, picking stocks is a thrilling experience. Selecting the right spectrum of stocks is also critical, as you don't want to invest completely in unprofitable, speculative companies. By spreading out your risk, you increase your chances of success.
Three stocks I believe are great ideas for 2022: Adobe (ADBE 0.79%), EPAM Systems (EPAM -0.52%), and Latch (LTCH -1.30%). All fill a different niche within a portfolio and should have different capital allocation levels.
Image Source: Getty Images.
Adobe: A stalwart company
Digital media giant, Adobe, has a market cap of more than $300 billion. While most people have interfaced with its Adobe Acrobat product, Adobe has more than 20 products inside its creative cloud segment, including Photoshop and Illustrator. This segment grew its revenue 21% to $2.4 billion during its third-quarter ending Sept. 3. The division hauls in an impressive $9.8 billion in annual recurring revenue (ARR).
Adobe has other offerings, like a document cloud competing against Docusign (DOCU -0.60%) and a fast-growing advertisement segment businesses can utilize to ensure their marketing strategy is working. Altogether, Adobe's revenue increased 22% during Q3 to $3.9 billion. Even more impressive is Adobe's 36.5% operating margin, which allows Adobe to generate massive amounts of cash.
Adobe rewards shareholders by repurchasing stock with that cash. During Q3, Adobe repurchased 1.7 million shares -- equivalent to about $1 billion. Nearly $14 billion still remains on Adobe's repurchase agreement, providing investors with another reason to purchase the stock as the share count will be reduced by around 5% when the agreement is completed. Management's guidance for the fourth quarter is 20% revenue growth and more than half a billion in new ARR. Adobe is a consistent, growing company that investors can use as an anchor in their portfolio. It may not provide massive growth, but it will be dependable.
EPAM Systems: Necessary for custom software
EPAM Systems is a mid-cap stock that operates a consulting and engineering business for custom software. Companies can contract EPAM systems to determine a solution, create the program, and then optimize and manage it after implementation. As a widely diversified company, EPAM derives about 60% of its revenue from North America, and its largest vertical, financial services, only make up 23% of total revenue.
Many businesses cut back on their consulting spending during 2020 due to the uncertainty caused by the COVID-19 pandemic, especially the travel and consumer vertical. In 2021, that funding came back aggressively and drove Q3 revenue growth to 52%. Sales almost eclipsed $1 billion in the quarter but will achieve the mark during Q4 as management guided 49% revenue growth at the midpoint. Based on the midpoint investors could possibly expect sales of $1.1 billion during the period.
Not all businesses can make custom software themselves; they need companies like EPAM to both create and maintain the programs. Because of this, EPAM will have a great investment case as long as it continues expanding its customer count.
Latch: The home-run swing
Barely a $1 billion company, Latch is growing quickly and gives this stock group some excitement. Its LatchOS is a building management software that gives its users several useful features. In an apartment complex, tenants can unlock their doors with their phones -- useful for guests and delivery services -- as well as control smart home devices. Recently, it expanded its operations to include office buildings, as it sees an opportunity in managing an office with a hybrid work environment.
Third-quarter revenue grew 120% to $11.2 million and ARR (annual recurring revenue) increased to $59.8 million. Contracts with apartments can be lumpy, and ARR is a key figure because quarterly revenue may be dependent upon a few contracts. LatchOS is becoming more common, as it has now booked more than half a billion home units. Unlike EPAM and Adobe, Latch is not profitable, and its net loss is nearly triple its revenue.
Latch is just starting, and investors have no clue if its product will be a fad or a requirement for new construction. Still, more than one in 10 new apartment buildings utilize LatchOS, and seven out of 10 of the National Multifamily Housing Council's top developers work with Latch. A growing company with a huge market gives Latch massive return potential.
The investment allocations
Since each has a different risk level associated with it, allocations should be tailored accordingly. It's crucial that investors assess their goals and the level of risks they are willing to take to create their own allocations. Taking a conservative approach, if I were purchasing this stock trio, I'd put the bulk of funds into Adobe, maybe half as much in EPAM Systems, and funnel the remaining into Latch. By doing this, the largest and most dependable companies receive the bulk of the investment whereas the long shot receives a fraction. If Latch doesn't work out, the other two will likely make up for the loss. Should Latch catch fire, the small allocation will transform into a larger portfolio slice and outshine the other two.
Remember, it's not about the number of shares investors can purchase; it's about the dollar amount invested in the stock. Because of this, it doesn't matter if you have $10 or $10,000, the principles still hold. Buying Adobe, EPAM Systems, and Latch with appropriate allocation will diversify investors across a couple of industries and business sizes. All three have great long-term potential and investors should hold each for at least three to five years for a better chance of success among a portfolio of at least 20 other diversified stocks.
