I own 30 stocks in my retirement account. Some of the companies are promising, but still have a lot to prove. Individually, each of those accounts for just a small percentage of the value of my overall portfolio. However, other companies have more proven business models, and their share price gains have significantly expanded their importance among my holdings.
In fact, just five stocks account for roughly 30% of my retirement portfolio: social media company Pinterest (PINS 0.89%), equipment rental company United Rentals (URI 5.09%), fintech company Block (SQ 5.04%), law enforcement partner Axon Enterprise (AXON 2.64%), and home-improvement retailer Floor & Decor Holdings (FND 1.34%). And even though these five represent outsized percentages of my net worth, I will continue holding them in 2022. Here's why.
Image source: Pinterest.
Pinterest: 5.1% of my portfolio
I first bought Pinterest stock in February 2020 at just under $20 per share. Early on, my investment thesis was playing out perfectly. Therefore, I added to my Pinterest position in October 2020, even though the stock had already more than doubled.
Here's my investing thesis with Pinterest: The platform is differentiated from its peers because it's a low-stress way to browse images and find inspiration for projects. This differentiation should drive user growth. Furthermore, Pinterest is under-monetized with its existing user base, especially in international markets, giving it opportunities for strong revenue growth as it gains new users and better monetizes them.
The monetization part of my Pinterest investing thesis has continued to play out beautifully. In 2019's third quarter, Pinterest was generating average quarterly revenue per user (ARPU) of $0.90. But as of Q3 2021, ARPU had increased to $1.41. This 57% increase might seem meager, but with nearly 450 million monthly active users, a $0.51 increase really adds up.
Its user growth is a slightly different story. Total monthly active users in the U.S. peaked at 98 million in Q3 2020. And monthly active users in international markets peaked at 380 million in Q1 2021.
Advertisers are increasingly discovering the potential of partnering with Pinterest, so I expect its ARPU to keep ticking upward in 2022. But I am concerned about user growth, and hope management finds a way to keep people regularly engaged with the platform.
Image source: Getty Images.
United Rentals: 5.6% of my portfolio
At the end of 2019, I looked up the top 10 stocks of the previous decade and was shocked to see United Rentals on the list. After researching what had made the company a market-beating investment, I picked up shares in January 2020 for $155 each.
The equipment rental business has been capital efficient for United Rentals. Its management team has a strong history of turning revenue into free cash flow (FCF), and that's something I expect will continue. The company has used its financial strength to play the role of industry consolidator by buying out similar companies. But with just a 13% market share, it's the largest player in its niche, showing just how fragmented the space is. It also repurchases a lot of its shares.
The three-year chart below tells the story: United Rentals' revenue, FCF, and cash balance all rose, whereas its share count and debt both declined.
URI Free Cash Flow data by YCharts
In short, my thesis for United Rentals has been playing out well so far. And with infrastructure spending high on the U.S. federal government's radar, I expect a strong equipment rental market again in 2022.
Image source: Block.
Block: 6% of my portfolio
It was called Square when I bought it in March 2020 for $52.85 per share. Generally speaking, I believe cash money is diminishing in importance around the world. And because of this, fintech companies like Block (as it's now called) stand to grow substantially in the coming decade. Block already boasts an impressive user base among merchants and consumers, which is one reason I like it. But I particularly favor Block over many other fintech companies because it has a commitment to launching new products and services, and it has a history of doing so successfully.
My investing thesis for Block is playing out very well, although I didn't foresee the COVID-19 pandemic that propelled fintech forward. For example, Block's Cash App ecosystem only had 24 million monthly active users at the end of 2019. As of the end of Q3 2021, it had around 40 million -- sensational two-year growth. And its seller ecosystem is also experiencing robust growth, as evidenced by the 52% increase in payment volume over the past two years.
While the thesis has been playing out for Block, I'll admit that there are some cloudy skies ahead. The company is reorganizing itself -- hence the name change -- and is adding two new ecosystems: a music business with Tidal and a cryptocurrency platform. Part of my thesis for Block is its ability to add new products and services, so on one hand, I'm pleased. On the other hand, successfully developing new businesses is challenging, and the effort could cause management to lose focus on its legacy businesses.
Nevertheless, I'm not planning on selling any of my Block shares at this time. The company has a track record of success, and I'm willing to give it the benefit of the doubt until it gives me reason to reconsider.
Image source: Axon Enterprise.
Axon Enterprise: 6.2% of my portfolio
In 2017, Taser International changed its name to Axon Enterprise as it pivoted to what would prove to be a stellar business model. It caught my eye at the time, when it was trading at around $25 per share, but I never pulled the trigger. The stock tripled before I finally bought some in May 2020 for $74.25 per share. At that point, many investors believed the train had already left the station. But I believe there are miles of track still ahead.
The name change reflected Axon's attempt to go from an irregular hardware-sales model (Tasers) to a predictable recurring-revenue model (Tasers, body cameras, and Axon Cloud packages). In 2020, its annual revenues reached $681 million, up from just $268 million in 2016. Since 2016 was its last year as Taser, I think it's fair to say its strategic shift is working. Moreover, a whopping 73% of 2020 revenue was tied to a subscription product, evidence of the effectiveness of its transformation.
This story is still playing out: In Q3 2021, Axon's annual recurring revenue reached $289 million, up 42% year over year. Furthermore, management estimates its cloud offerings have only 2% penetration in the U.S. market and even lower penetration internationally. In short, these are the tracks this train can keep chugging along on.
The cherry on top for 2022 is Axon's bottom line. Only 27% of its revenue currently comes from Axon Cloud, but it's the highest profit-margin segment of the business with a 74.6% gross margin in Q3. Because this is also the fastest-growing part of Axon, the company's overall profitability should keep getting better in the coming year.
Image source: Getty Images.
Floor & Decor: 7.5% of my portfolio
A home-improvement project emergency sent me running to a Floor & Decor store for the first time in 2019, and the result of that trip motivated me to see if it was a publicly traded company. Not only was I pleasantly surprised to find that it was, my subsequent research compelled me to purchase shares in December of that year for about $50 per share. And when I witnessed how well the company was navigating the first year of the pandemic, I bought more shares in October 2020 at about $72 per share.
Floor & Decor only operates 153 locations today, but it believes the U.S. market could support 400. Management intends to grow its store count 20% annually to get there, which provides roughly six years of growth. But its sales per location have also increased for almost 13 consecutive years, a trend that should continue as the brand keeps gaining recognition. And these increased sales per location help it gain operating leverage, boosting profit margins.
Assuming Floor & Decor management can grow its store count as fast as planned, it's not unreasonable to think revenue could more than double over the next five years. If sales per location continue increasing as well, that would boost revenues even further. And with the resulting profit margin improvements, it's possible the company could triple its earnings over this span. I'm betting results like these will help the stock beat the market.
For 2022, I expect Floor & Decor to hit the gas with new store locations. In 2020, it had to slow down new openings because of the pandemic. And 2021 has been fraught with construction delays due to the labor shortage. But the new-location pipeline should be ready to go as conditions normalize.
Two things these stocks have in common
Attentive readers may have noticed that I've owned all five of these stocks for less than three years. This is the primary reason I'm holding these stocks in 2022 -- I'm fully committed to holding every stock I buy for three years minimum. This gives my investing theses adequate time to play out. Sometimes it takes years for a thesis to be proven right. Conversely, in these cases, it's still far too early to declare victory.
That said, all five of these stocks have been winners for me so far. And when you let your winners run, they come to occupy large positions in your portfolio. Personally, this is exactly what I want -- I want my winning stocks to be the most important positions in my portfolio. That's why I'm willing to ride these five stocks into the new year without hesitation.
