Every great investor had to start somewhere. As a beginner in the stock market, you should lean on companies you know like the back of your hand.
Everyone is different, but I can get you started in the right direction. The two high-octane growth stocks below are also household names with powerful brands. Moreover, their business models are so simple that a ham sandwich could run these companies.
So let me show you why your first stock portfolio should include some shares of Netflix (NFLX -0.63%) and Costco Wholesale (COST 1.01%).
Image source: Getty Images.
Netflix: The future of entertainment
Everybody knows Netflix nowadays. The company basically created the market for digital video streaming and remains a global leader in that sector a decade later. It also spends more money on producing new shows and movies than any of its rivals, which results in a high-quality content portfolio that tends to dominate the awards season.
Lately, some Netflix investors have worried about the company's slowing subscriber additions. Three months ago, management said that the next quarterly report should show roughly 2.5 million additional subscribers. That would be the slowest first-quarter growth since Netflix started running digital streaming as a business. This scary projection for next week's first-quarter update sent many shareholders running for the exits. That's why Netflix shares are trading 35% lower over the last three months.
To me, that price drop opens up a fantastic buying opportunity. You see, temporary bumps in the road don't really matter in the long run. The video entertainment market is still dominated by old-school cable, satellite, and broadcast television. Netflix expects a long-term market transition to nearly pure digital streaming, which might take another 10 to 20 years.
Co-CEO Ted Sarandos said in January's fourth-quarter earnings call: "The pace of the migration may be a little hard to call from time to time when there are kind of varied global events or even local conditions, but it's absolutely happening. There's no question of that."
So the untapped market opportunity is enormous, and we are still in the early days of the video-streaming sector's development. At the same time, Netflix has a proven ability to play down subscriber growth when it wants to boost its bottom-line profits instead. This can be done in several different ways, such as raising subscriber prices or slowing down its advertising and marketing campaigns.
So the next time market makers panic over a quarter or two of disappointing subscriber growth, you can remind yourself that Netflix can grow its business in other ways during those slow periods. In the end, the company's top-line sales and bottom-line profits are not slowing down at all:
NFLX revenue (TTM). Data by YCharts. TTM = trailing 12 months.
Costco: The profits are in the membership fees
The wholesale retailer's warehouses are iconic. Costco offers a wide variety of goods with price tags very close to the break-even point. If they were set any lower, Costco would be losing money on every item sold.
At the same time, the company is famous for the robust salaries and benefits it offers to employees. So the staffing costs are high, but the profit margins are slim. Yet Costco makes a ton of money at the end of the day. In 2021, the company pulled in $5.5 billion of bottom-line net income. How does that even work?
Costco's secret sauce is in its shopping club memberships. You can't take advantage of its low prices until you pay up for an annual membership. A basic Costco card costs $60 a year, and you can pay twice as much for an executive membership that brings cash-back bonuses and other extra features. That might not sound like much, but those fees really add up in a hurry.
In fiscal year 2021, which ended on Aug. 29 last year, Costco had 61.7 million paid cardholders; the membership fees added up to $3.88 billion. That's 77% of Costco's total net income.
The membership cards are an amazing cash machine, but that's not all. The card-based shopping also makes customers more loyal to Costco and more likely to recommend these stores to their friends and neighbors. It's a cash cow wrapped in layers of word-of-mouth marketing and customer-retention hooks.
This business model is a stroke of genius, and it shows in the financial results. Costco's sales more than doubled over the last decade, with an extra rush of acceleration in the last couple of years. At the same time, net profits more than tripled thanks to the extreme profitability of the membership program:
COST net income (TTM). Data by YCharts.
