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5 Top Stocks for January

Key Points

  • While 2021 was a great year for stocks, some excellent companies missed the rally, making them look like attractive buys heading into 2022.
  • Lower prices aren't the only draw. These stocks also boast enticing growth prospects.
  • Those catalysts position these top stocks to potentially deliver big-time total returns in 2022 and beyond.

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These stocks top our lists as the best ones to buy this January.

This past year has been a fantastic one for investors. The S&P 500 was up over 27% in 2021 with the index routinely notching new all-time highs. Many stocks delivered even bigger gains as investors benefited from soaring corporate profits and some help from the Federal Reserve. 

It's hard to imagine 2022 topping last year. However, that doesn't mean we don't see compelling investment opportunties. We asked some of our contributors for their top stocks to buy in the new year. Here's why they chose social media platform Pinterest (PINS 2.18%), diagnostic testing company Quidel (QDEL), tech-enabled insurer Lemonade (LMND -2.78%), cannabis retailer Planet 13 Holdings (PLTH -2.73%), and renewable energy giant Brookfield Renewable (BEPC 1.09%) (BEP 2.02%)

A finger pointing to a rising stock chart with the year 2022 at the top.

Image source: Getty Images.

Last year's pain can be investors' gain in 2022

Sean Williams (Pinterest): Welcome to a new year and new opportunities to build your wealth. As we move into January with high hopes for another green year on Wall Street, my top stock to buy is beaten-down social media company Pinterest.

Wall Street's "beef" with Pinterest has been the company's declining monthly active user (MAU) count in the sequential second and third quarters of 2021. Total MAUs dropped from 478 million in 2021's first quarter to 444 million in the same year's third quarter.

However, there's a very reasonable explanation for this decline. An uptick in coronavirus vaccination rates has allowed many people to return to some semblance of normal. That means fewer hours spent on a smartphone, tablet, or computer. In other words, it was only natural for the huge MAU spike Pinterest enjoyed in 2020 to revert a bit. But make no mistake about it, Pinterest's user growth remains within historic norms.

What's far more important than user growth is the company's ability to monetize its existing users -- and that's something Pinterest is having no problem with. Even with year-over-year MAU growth of less than 1% in Q3, global average revenue per user (ARPU) surged 37%, with international ARPU catapulting even higher to 81%. Clearly, advertisers will pay a premium to reach Pinterest's motivated shoppers.

And let's not overlook the best aspect of Pinterest: Its entire operating model is built on users sharing what products, places, and services they like. There's no guesswork for advertisers, which makes Pinterest an absolute magnet for ad revenue.

A forward price-to-earnings (P/E) ratio of 27 is simply too inexpensive for a company with a sustainable growth rate of 25%, or higher.

Staying in the fight against COVID-19

Dan Caplinger (Quidel): It's been two years since the virus that causes COVID-19 first came into the limelight, and the resulting global pandemic has been devastating both in terms of millions of lives lost and the massive economic impact on billions of people worldwide. Hopes for an end to the pandemic have met with the harsh reality of the delta and omicron variants, and new-case counts in many areas of the world are at their highest ever.

With the rise of omicron, the diagnostic tests that Quidel produces have experienced high demand. The company's molecular diagnostics division stepped up to the plate at the beginning of the pandemic, producing tests to detect the virus. Predictably, the company has seen soaring sales and profits, with revenue in 2020 tripling from 2019 levels and net income rising to 11 times its previous year's total. Quidel has seen that high demand persist in 2021, with revenue and earnings actually climbing slightly over 2020's final figures.

Quidel's stock quadrupled in the first half of 2020, reflecting optimism about its COVID-19 testing prospects. But since then, Quidel has lost 55% of its value as investors figured the pandemic was coming to an end.

I'm not that optimistic about COVID-19 going away anytime soon, and even with 2022 earnings projected to fall by 75%, Quidel's current stock price is just 18 times its projected profits for 2022. Quidel has an extensive line of other testing products that should gain credibility because of its success in handling COVID-19, and that's why I think the stock offers a margin of safety while also serving to deal with the new reality as the pandemic continues.

A misunderstood insurance giant in the making 

Jason Hall (Lemonade): One look at the stock chart, and it stands to reason why you'd think Lemonade's business results this year have been terrible: 

LMND Chart

LMND data by YCharts

The reality is, Lemonade is growing rapidly, and its customers are increasingly spending more. Through the third quarter, its 1.36 million customer count was up 45% from last year, and the average premium per customer is up 26%. Lemonade finished Q3 with $347 million in in-force premiums, a massive 84% increase. Over the same period, revenue is up less than 15%, a product of the way insurers recognize revenue over the life of a policy, not all at once. 

Lemonade's losses continue to grow, too -- another worry for investors who expected the company to start moving toward profits by now. Instead, net losses have almost doubled. So what gives? In short, nothing. This is what management told us to expect; it went public to raise the funds to spend on growth. 

Its recent deal to acquire Metromile (MILE) is one example and could prove transformative. This deal accelerates Lemonade's expansion into auto insurance since Metromile is licensed in 49 states. It's paying about 2 times book value to buy the entire business, a veritable steal of a deal considering what it brings.

Yes, there's risk that Lemonade's growth stalls before it gets to scale. But with over $1 billion in cash and no debt, the company has picked the right time to aggressively grow. For patient investors, now is also the time to buy this insurance disruptor before the market catches up to the opportunity. 

The only marijuana stock I'd buy right now

Matt Frankel, CFP® (Planet 13 Holdings): There has been no shortage of hype about investing in marijuana stocks in recent years, but there are surprisingly few companies that actually have solid, revenue-generating businesses.

If you aren't familiar, Planet 13 operates a cannabis superstore about the size of the average Walmart (WMT 1.67%) in Las Vegas. It recently opened a second location in the San Diego area. As of the third quarter of 2021, the company is generating more than $130 million in annualized revenue, up 45% year over year. And the business is profitable on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis.

There are several potential long-term growth catalysts for the business. First are its superstores, which the company has said it would be interested in opening in any market large enough to support a professional sports team. This alone could grow into a multibillion-dollar revenue stream, and I'm especially excited about the company's unlimited Florida license, which could ultimately lead to several new superstores all by itself.

In addition, Planet 13 is starting to invest in smaller-scale neighborhood dispensaries, which could create a hub-and-spoke distribution model along with the superstores. It's important to mention that Planet 13 produces its own cannabis and related products, with several of its own brands already available in dozens of third-party retail locations.

Finally, thanks to the recent decline in high-growth stocks in general, Planet 13 is trading 65% below its 2021 high despite all of its key business metrics moving in the right direction. With a market cap of just $575 million, Planet 13 is still a very small company and is cheaply valued relative to its potential. As we head into 2022, now could be a great time for risk-tolerant investors to add this growing business to their portfolio.

This renewable energy powerhouse is on sale

Matt DiLallo (Brookfield Renewable): What a difference a year makes. In 2020, Brookfield Renewable was red hot. Its stock soared nearly 75%, while its total return after adding its dividend was over 82%. However, the renewable energy giant has cooled off in 2021, with shares falling nearly 20%. 

That sell-off seems a bit much. Brookfield Renewable continued to deliver strong results in 2021. Its cash flow per share was up nearly 20% year over year through the third quarter. On top of that, the company made excellent progress on its long-term growth strategy. It secured several new investments, giving it plenty of power to keep growing. 

Brookfield estimates that it can grow its cash flow per share by as much as 20% per year through 2026 as it helps support the global transition to clean energy. That should enable the company to increase its dividend, which yields 3.4% following this year's sell-off in its stock price, at a high single-digit annual rate in the coming years. Add in Brookfield's top-tier financial profile, and it's a low-risk way to potentially earn a high return in 2022 and beyond.

Dan Caplinger owns Brookfield Renewable Partners L.P. and Pinterest. Jason Hall owns Brookfield Renewable Corporation Inc., Lemonade, Inc., and Pinterest. Matthew DiLallo owns Brookfield Renewable Corporation Inc., Brookfield Renewable Partners L.P., Lemonade, Inc., and Pinterest. Matthew Frankel, CFP® owns Lemonade, Inc. and Pinterest. Sean Williams owns Pinterest. The Motley Fool owns and recommends Brookfield Renewable Corporation Inc., Lemonade, Inc., Pinterest, Planet 13 Holdings Inc., and Quidel. The Motley Fool has a disclosure policy.

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