Position sizing can be essential to successful investing. You don't need to put a lot of money into a "lottery ticket" type of investment as you stand to lose a lot if that one pick doesn't work out. However, just a tiny sum can generate huge returns if it works. In other words, you need to be smart about how you distribute your stock investments.
If you're investing larger sums, say $50,000, it might be wise to spread that sum out among multiple investments, balancing risk management with the potential for upside. It also helps to find proven winners that still have room to grow over the years ahead. Here are three stocks that offer diversification as well as a proven ability to generate profit that could help you put together a winning investment combination.
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1. Amazon
E-commerce is what Amazon (AMZN -4.41%) is known most for, which makes sense considering the company accounts for 41% of all e-commerce sales in the United States. But what investors may want to focus on moving forward is the company's secondary cloud business that could have even more potential than e-commerce in the long run.
Along with dominating e-commerce, Amazon's also the world's leading cloud infrastructure vendor. Its Amazon Web Services (AWS) segment provides the servers, networking, and storage on which much of the World Wide Web operates. It provides an estimated 32% of the world's infrastructure services, and there's room for growth moving forward as technology moves from "on-premise" locations, like the server room at the neighborhood office building, to these centralized networks referred to as the "cloud."
AWS generated $62 billion in revenue in 2021, just 13% of Amazon's total for the year. However, it's the company's profit engine, accounting for 100% of Amazon's operating income in fourth-quarter 2021. Net revenue for AWS grew 40% year over year in Q4, so the segment still has a lot of momentum. If AWS continues to grow at these rates, its strong profitability should drive earnings growth for Amazon's overall bottom line, making it arguably the primary reason to consider adding the stock to your portfolio.
2. Visa
Payments processing is one of the world's largest industries. Money is constantly moving between consumers and businesses, and Visa's (V -2.17%) payment network helps make it all possible. Visa's network links the bank that backs your Visa-branded credit or debit card and the payment terminal you swipe your card through to pay for something. It collects a fee from every transaction, which accounts for most of its annual revenue.
Visa's business is very profitable, converting anywhere between $0.45 and $0.60 of every revenue dollar into free cash flow, a very high percentage profit margin. Visa doesn't require a lot of capital to maintain its business, so much of its revenue goes straight to its bottom line. And because it takes a percentage of the transactions it processes, its revenue grows as the transaction size grows, making it a stock that should do well during times like now when inflation is high.
The company's revenue grew 25% year over year in Visa's most recent quarter (Q1 fiscal 2022). Some of this was due to an increase in travel compared to 2020. Visa has averaged 10% revenue growth annually over the past decade. Even if growth slows down some in future quarters, Visa still has growth opportunities moving forward. It controls roughly half of the world's payment cards, and the global economy continues moving away from cash as a payment method.
3. Meta Platforms
Social media company Meta Platforms (META -1.31%) hasn't been very popular with investors lately, with its stock price falling roughly 30% over the past month after a disappointing Q4 2021 earnings report. Some of the company's core businesses, like Facebook, could indeed be close to peaking in terms of users. However, investors shouldn't dismiss the company's near-monopoly on social media and the massive audience it provides to potential advertisers.
Each month, roughly 3.6 billion people use one of Meta's platforms, including Facebook, Instagram, and WhatsApp. The advertising targeted to these users is very profitable for Meta ($116 billion in revenue in 2021). Meta converts between $0.30 and $0.40 of every revenue dollar into free cash flow. The company's revenue keeps growing (up 37% year over year in Q4 2021). And Meta is using that excess cash to invest in itself as well as buying back massive amounts of its stock to help keep its earnings per share growing.
If the social media business does peak -- and it's still too early to say it has -- I would argue that the decline will be slow because Instagram remains a powerful and growing platform, with an estimated 1 billion users. In the meantime, CEO Mark Zuckerberg has already put the company on a path to its next business focus, investing billions in the metaverse through its newly formed Reality Labs segment. If you believe in the digital economy moving forward, Meta Platforms is a strong business positioned to benefit from it.
