We're just two trading weeks into the new year and already we've seen intense U.S. stock market and crypto market volatility. At the time of this writing, the Nasdaq Composite is already down over 5% so far this year.
Investors trying to get their bearings after the stock market doubled over the last three years have come to the right place. Instead of diving all into one category, a basket of stocks including Adobe (ADBE 0.87%), Starbucks (SBUX 0.47%), and Ethereum (ETH -1.00%) offers a balance of growth, value, and income. Here's why this group has long-term potential.
Image source: Getty Images.
Adobe: A wide moat
The best growth stocks aren't the fastest growers, but, rather, are the companies that have industry-leading positions in exciting marketplaces, offer strong profit, and generate consistent positive free cash flow. If the last few years have taught us anything, it's that the market favors this balanced level of growth at a reasonable price over growth at all costs. And few companies do it better than Adobe.
Year after year, Adobe stock produces excellent returns not because it posts rapid revenue growth, but because it pairs moderate revenue growth with increasing profitability. Adobe is a linchpin in the creative software industry and was a pioneer in transitioning toward software as a service. Today, its creative cloud, document cloud, and experience cloud segments generate stable growth and profits even during difficult economic times simply because Adobe is truly a staple of the digital age.
A few decades ago, discussions of recession resilience were usually reserved for consumer staple companies like Procter & Gamble that make products people need no matter how the economy is doing. Today, one could argue that companies like Adobe are digital staples, or enterprise staples because their solutions are needed to conduct business. Given its massive moat, improved profitability, and the fact that it's down 26% from its 52-week high, Adobe stands out as a solid all-around growth stock to buy in 2022 and hold forever.
Starbucks: A modern-day value stock
Starbucks has transitioned from a growth stock to a value and dividend stock that could be a foundational holding in virtually any portfolio. The traditional framework of value investing developed by Benjamin Graham and adopted and modernized by investors like Warren Buffett, Mohnish Pabrai, and Guy Spier involves stripping down a company's book value, earnings, and other metrics to see if its stock is trading at a discount relative to this intrinsic value. Typically, these companies were unknown names in cyclical or unattractive industries. But today, high-frequency trading, sophisticated modeling, and access to data have reduced the effectiveness for a retail investor to use this old style of arbitrage value investing.
Investors could argue that today's value stocks are companies with fair price-to-earnings, price-to-free-cash-flow, and price-to-sales ratios that are also incredibly dominant brands capable of outlasting economic cycles and growing for decades to come. Starbucks fits this model of the modern-day value stock. After coming off of a terrible fiscal year in 2020, which was impacted by the COVID-19 pandemic, Starbucks notched record-high revenue in its fiscal year 2021 while growing earnings and free cash flow.
ADBE Revenue (Annual) data by YCharts
In order to continue the momentum, the company could use the following ways as some potential options to sustain organic growth:
- Open more stores in the U.S., China, and other developed and developing markets.
- Expand the drink menu and tap into higher-margin drinks and food items.
- Increase the dollar number per transaction.
- Facilitate repeat business through an easy-to-use application that would allow for mobile orders and payments.
- Adding more drive-thru stores at smaller footprints than in-store coffee house style locations.
Throw in a 2% dividend yield, and there's a lot to like about Starbucks stock, especially now that it's trading around 25% off its 52-week high.
Ethereum: A simple way to approach crypto investing
With so much happening in the crypto space, it's easy to get sidetracked chasing outsized returns. Filter out all the noise, and it's plain to see that as long as crypto grows, Ethereum should grow along with it.
Ethereum has a role in so much of the crypto market. It's the Layer 1 blockchain upon which Layer 2 projects like Polygon and Chainlink operate. Its also interconnected with development apps (dApps). To grow, Ethereum doesn't need speculative investors to simply bid up its price. It just needs the value of the network it supports to grow and it should grow along with it.
Image source: Getty Images.
While Ethereum is unlikely to be the best-performing crypto, it stands out as the best all-around bet. The most someone can lose is 100%, but it's not unreasonable to imagine Ethereum increasing by tenfold from its current price. If we sit back and think about the potential of crypto, similar to the potential of smartphones 10 years ago, it's possible for Ethereum to be worth, say, as much as Apple over the next five to 10 years. At just shy of a $400 billion market cap, Ethereum growing to around Apple's $2.8 trillion market cap would be a sevenfold return.
Despite its potential, Ethereum isn't without its risks. The unknown outcome of the Ethereum 2.0 upgrade, the threat of other blockchains taking market share from Ethereum, or simply a disruption in the crypto industry as a whole could all impact the investment thesis for Etheruem. Given how risky crypto is, most investors are probably better off simply dollar-cost averaging into Ethereum over time instead of chasing the supposedly next biggest altcoin.
A diversified basket worth considering
Adobe, Starbucks, and Ethereum each have their own powerful investment thesis -- but they're even stronger when grouped together. The through-line is that each option is an industry leader, which gives the basket a better chance of powering through a market sell-off. The good ones tend to make it through.
As tempting as it can be to try and snatch up heavily discounted growth stocks on dips, the better risk-reward option for most investors is simply to invest in companies that investors can confidently say will be around 20-plus years from now. Adobe, Starbucks, and Ethereum all seem to fit that mold. And for that reason, they all look to be fantastic buys now.
