Building an excellent stock portfolio is a lot like making a fantastic meal. It requires the right recipe, exceptional ingredients, and the time and patience to bring it all together.
When building a large portfolio, investors should aim for 25 or more stocks. And while there are quite a few companies out there that would help bolster and diversify any good stock portfolio, not all picks are created equal. If I only had three stocks to choose from and $50,000 to invest, the following would be my top three stocks to buy: Amazon (AMZN -0.22%), Lululemon (LULU -0.79%), and Chevron (CVX 0.12%). The first two are growth plays and Chevron adds value to the portfolio. With that said, here's a closer look at why these three stocks are great picks.
Amazon provides a strong foundation
Any good recipe needs a focal point -- a solid base on which everything else is built. When it comes to a stock portfolio, Amazon provides that wonderful foundation.
Amazon is one of the world's premier companies. It operates across several segments: e-commerce, cloud computing, and advertising. With over 40% market share, Amazon dominates the e-commerce market. Its cloud business, Amazon Web Services, holds the largest share of the red-hot cloud infrastructure market. Finally, its advertising business is taking market share from competitors like Alphabet and Meta Platforms.
Amazon's size and scale are truly jaw-dropping. With $486 billion in revenue over the last 12 months, the company is now the second-largest American company by revenue (only Walmart generated more). What's more, analysts not only expect Amazon's growth to continue -- they expect it to accelerate.
Wall Street expects Amazon's revenue to grow to $522 billion this year -- up 11% from 2021. Yet, they estimate that figure to jump to over $600 billion in 2023, a surge of more than 15%. At that rate, it's possible Amazon's revenue total could overtake Walmart within two to five years.
Adding to its appeal, Amazon stock is the cheapest it has been in years. Its current price-to-sales ratio is 2.7x, significantly below its five-year average of 3.8x.
Lululemon brings an extra layer of growth
I think a little bit of spice makes every meal better. To that end, I'm adding athletic apparel maker Lululemon to my portfolio recipe.
The company recently blew away analyst expectations with its earnings results for the fiscal second quarter (the three months ending July 31, 2022). Highlights included the following:
- Revenue and earnings per share beat estimates.
- Management raised its guidance for the full fiscal year.
- Same-store sales grew 23%.
- International sales jumped 35%.
But behind these fantastic numbers are Lululemon's real stars: its products. The company makes and sells comfortable, attractive, and upscale clothing and accessories. Its status as a "premium" brand has helped it thrive, even as other consumer brands have floundered. Lululemon's customers, who tend to be wealthier, have continued spending despite inflation; whereas, middle- and lower-income shoppers have cut back on purchases.
What's more, management reiterated its commitment to doubling its revenue to $12.5 billion by 2026. That's precisely the sort of goal long-term investors should look for when building a large portfolio. Lululemon's plan is ambitious, but it's clear that the company is well on its way to meeting its goal, which could mean big returns for investors.
Chevron adds reliable value
Every portfolio should have a mix of growth and value. Amazon and Lululemon provide the growth for my hypothetical portfolio, and Chevron brings the value.
With a forward price-to-earnings ratio of only 10x, Chevron is by far the cheapest of the three stocks I've mentioned. Moreover, it's the only one that pays a dividend. The company pays $5.68 per share annually, which works out to a 3.6% dividend yield. In fact, Chevron has increased its annual dividend for 35 years straight, making it a Dividend Aristocrat. And with oil and gas prices near record highs, Chevron appears well positioned to keep increasing its dividend for years to come.
The company generated $30.2 billion of free cash flow in its most recent quarter (the three months ending June 30, 2022). That works out to an excess of $15.61 per share. That's more than enough to enable Chevron to continue paying its regular dividend, and then some. The company also announced an increase of its share repurchase plan, hiking the total from $10 billion to $15 billion.
And if that weren't enough, there's something else to consider. Warren Buffett owns more than $25 billion worth of Chevron shares, or 8.4% of the outstanding shares. In fact, Chevron is the third-largest holding for Buffett's Berkshire Hathaway.
Between its solid dividend, growing share-buyback program, and Warren Buffett's seal of approval, Chevron stands to make its investors happier and richer over the next few years. And that's a recipe everyone can appreciate.