I often get asked for detailed instructions on how to begin investing. The market can be intimidating, with so many stocks to choose from and so much conflicting advice about what decisions to make and when. There is no single correct way to get started, but I can offer three simple suggestions:
- Invest for the long-term. Timing the market really just gambling, and even terrific companies' stocks can go down after purchase, no matter when you buy. In the long run, though, quality stocks prove themselves to be great vehicles for wealth creation.
- Consider the risks. It's tempting to go with the latest meme stock craze in an attempt to make fast gains, but the risks are high. Most investors will perform better in the long run with profitable companies that have robust cash flow and a history of outperformance.
- Focus on secular growth industries. Cloud computing, cybersecurity, and semiconductors are examples of growing sectors that increase your chances of outperforming.
When your investing strategy is ready, you might want to consider these three stocks, which are unique high performers with tremendous potential.
1. Amazon: Will pain lead to gain for this stock?
When the pandemic was causing carnage across many economic sectors, Amazon (AMZN -0.41%) was experiencing a boom in online retail. Total sales rocketed 38% in 2020 and another 22% in 2021, going from $280.5 billion to $469.8 billion in just two years. Operating income rose, and so did the stock. Unfortunately, Amazon couldn't overcome the list of challenges that followed.
Inflation, rising wages, and continued logistical headaches have added billions in expenses, and Amazon's bottom line and its stock price have suffered as a result. Amazon's two retail sales-related segments posted operating losses of over $1 billion each in Q1.
Fortunately, Amazon is not a one-trick pony. Its third segment, Amazon Web Services (AWS), is astonishingly successful. As the chart shows, AWS is the global market leader in cloud infrastructure services.
It grew sales by 37% in 2021 to $62.2 billion. This continued in Q1 2022 with another 37% gain over the previous year. AWS's revenue is projected to hit $85 billion this year if this rate continues. Best of all, it is massively profitable -- to the tune of a 35% operating margin in Q1.
If AWS were a standalone company, it would probably fetch a valuation of at least $850 billion. This is the equivalent to 10 times projected sales for 2022 -- the same price-to-sales (P/S) ratio that Microsoft commands. Since Amazon's total market cap is around $1.25 trillion, this makes the rest of the company, at $408 billion in 2021 sales, a great value.
Amazon will report Q2 earnings on Thursday, July 28, and the results are likely to be mixed. The stock-price volatility that could result supports the investing advice to buy stocks in tranches, like dollar-cost averaging, to help mitigate short-term risks.
When will the retail headwinds subside? It's still unclear and depends largely on the economy getting back on track. But they will subside, and Amazon stock should soar again when they do.
2. Texas Instruments: Cash is still king for this chip company
Semiconductor, or "chip," stocks tend to be highly cyclical. When the economy slows, demand falters, and the stock can get crushed. Popular semiconductor stocks like Advanced Micro Devices and Nvidia have fallen nearly 40% this year on worries about the broader economy. But Texas Instruments' (TXN -1.13%) stock has held up much better, as the chart shows.
The reason for this is simple: Texas Instruments is a cash cow. Sometimes investors get too caught up in the top revenue figure and forget what really matters: How much free cash does the company generate? Texas Instruments has one of the best cash management track records around.
The company has grown its dividend annually for 18 straight years, whether the economy was boom or bust, at a compound annual growth rate (CAGR) of 25% and that growth is a result of ever-increasing free cash flow per share, which is up at a CAGR of 12%.
Texas Instruments' dividend currently yields 2.7% (a solid passive income rate) and is a terrific buy-and-hold portfolio addition.
3. CrowdStrike: Cybersecurity is mission-critical
Cybersecurity is top of mind for many executives. Breaches, ransomware, and other events are costly, time-consuming, and bad for businesses' reputations. Cloud-based artificial intelligence-powered cybersecurity company CrowdStrike Holdings (CRWD 0.59%) has made stopping breaches its mission.
Since bursting onto the scene a few years ago, CrowdStrike has quickly earned industry clout. More than half of the Fortune 500 and 15 top 20 banks trust its solutions. Its total customer base has exploded in just a few years, as shown in the chart.
This number rose to nearly 18,000 in fiscal 2023's first quarter, while annual recurring revenue (ARR) reached $1.9 billion on 61% year-over-year growth.
CrowdStrike is a stock for intrepid investors willing to accept more risk. The company isn't profitable yet, although its high gross margin and growing free cash flow indicate future success.
The stock is trading well down from its recent high, but the market may still create better entry points. Volatility is a hallmark of growth stocks, so it's best to accumulate a position over time by using dollar-cost averaging.
Perhaps the biggest key to beginning to invest is simply getting started. There will never be a perfect economy, and the stock market doesn't send out invitations when it's the best time to buy. Beginning to invest and continuing to do so over time is key to building wealth -- and that is the wisest investing move we make.