One of the key tenets of my investing approach is to regularly add new money to my account, allowing myself to make new purchases. Therefore, I'll purchase more stocks before this year is done as I add new cash to my account. And it's likely I'll buy more of some stocks I already own instead of starting new positions in other companies.
That's subject to change, of course. I could easily be lured into starting positions in cryptocurrency exchange Coinbase Global, restaurant-ordering platform Olo, or luxury furniture company RH. However, with 35 open positions in my retirement portfolio already, I see value in adding to the companies I'm particularly bullish on.
For me, home-improvement retailer Floor & Decor Holdings (FND -0.76%), advertising technology (adtech) company PubMatic (PUBM 1.49%), and travel booking platform Airbnb (ABNB -0.85%) are three stocks I already own that I'd like larger positions in. Below, I've noted how big these positions already are in my retirement account and laid out the reasons why I want to own more of each.
1. Floor & Decor: 4.9%
Flooring retail specialist Floor & Decor has three qualities I absolutely crave in a retail investment. First, it's opening up new locations at a red-hot pace, going from 83 stores at the end of 2017 to 178 stores as of the end of the third quarter of 2022. Second, the company is on pace for a 14th consecutive year of same-store sales growth, boosting its store-level profitability. And third, speaking of profits, it's been a profitable company on a net-income basis for as far back as the public data goes and has a healthy 7.1% net profit margin year to date.
I believe that this simple recipe will produce a delicious investment outcome over the next decade for Floor & Decor. Management has previously targeted growing its store count 20% annually on the way to 500 locations long term. I expect the company to have fully grown its footprint before 2030.
Home improvement retailers, including Floor & Decor, are facing some near-term uncertainty. Housing prices are faltering, which could impact home-improvement spending. But given the consistency of its results so far, I expect ongoing same-store sales growth and profitability for Floor & Decor over the coming decade. And once it nearly triples its store count, I expect sales and cash flow to be dramatically higher than they are now.
Also consider that larger rivals Home Depot and Lowe's pay dividends. Floor & Decor doesn't pay a dividend today, but I expect that will change once it exits growth mode. Therefore, by buying more of this stock today, I get to participate in the company's growth, and I'll likely be rewarded down the road with an attractive dividend.
2. PubMatic: 2.7%
Publift, a small company trying to help publishers understand the digital-ad ecosystem better, recently published a list of 24 sizable supply-side ad platforms (SSPs). PubMatic was on that list, but there are more SSPs than just the two dozen listed. My main point here is to note how the SSP space is indisputably recognized as highly competitive, but that's why I love PubMatic stock and want to own more of it.
Publishers frequently work with dozens of SSPs simultaneously, but PubMatic partners with its publisher clients to "optimize" their adtech structure -- cutting out certain SSPs and focusing on just a few. This can yield better and more profitable results for the publisher. And by doing this, PubMatic is taking market share from the crowded field of competitors.
In the third quarter of 2022, over 30% of PubMatic's revenue came from supply path optimization deals, up from just 27% of revenue in the first quarter. Therefore, almost a third of revenue comes from deals in which PubMatic is one of just a few players. In other words, as SSPs are being weeded out, PubMatic is making it safely through to the other side.
Investors are worried about the ad industry right now because of the economy. It makes sense. PubMatic's third-quarter revenue was only up 11% year over year -- its slowest growth rate as a public company by far. And revenue is expected to be flat next quarter.
Therefore, there are near-term headwinds, but investor fears have pushed PubMatic's valuation to very attractive levels. It currently trades at about 20 times trailing earnings -- comparable to the average for the S&P 500 -- which is a steal for a small company with big long-term potential.
3. Airbnb: 2.2%
Airbnb updates its platform twice a year. On Nov. 16, the company had its winter release, showcasing some new features that are sure to make its hosts and guests happy. I believe this, because co-founder and CEO Brian Chesky is very engaged with the Airbnb community and frequently crowdsources ideas, including some of these latest ones.
Among Airbnb's recent changes is a growing prioritization of stays that are a good value. Hosts are getting tools to see how their properties stack up, but this could also reverse a recent beneficial trend for the company. Last quarter, the average daily rate (ADR) for an Airbnb stay was $156 per night, up 5% year over year. Growing ADR boosts booking volume, but if Airbnb prioritizes value, ADR could drop in coming years.
This could be a headwind, but I find the breeze refreshing nonetheless. Airbnb is considered the top player in the short-term rental space -- a space with incredible profit potential. But if Airbnb wants to hold its spot at the top, it must cater to its users. Prioritizing value, along with the other improvements in the winter release, improves the user experience, and that's what matters most.
Speaking of profit potential, Airbnb is turning in its best results ever. The company had $1.2 billion in third-quarter net income on just $2.9 billion in revenue. This 42% margin shouldn't be expected every quarter, but it was hardly a fluke. By simply being the middle party in short-term rental transactions, Airbnb has high profit potential, and it's starting to flex those muscles.
Related to net income is the free cash flow (FCF) metric, which adjusts for things including noncash expenses. Airbnb's trailing-12-month FCF is $3.3 billion, which is a good amount for a company with a market capitalization of $63 billion as of this writing.
One of my most successful past investments was PayPal, which I bought in 2015 on the simple premise that high FCF would snowball into favorable shareholder returns over the long term. That oversimplified investment thesis worked out with PayPal, and it can contribute to good returns for Airbnb too.
Having an increasing pile of cash to work with gives Airbnb's management options. It's admittedly possible that executives will turn out to be poor capital allocators, but I'm willing to bet on Chesky's ongoing vision, considering he grew a global enterprise from an idea that started in his apartment just 14 years ago.
The top of the list
Perhaps counterintuitively, the stock I'm looking to add to the most right now is Floor & Decor, the largest of these three holdings for me, because its near-term downside is the most limited. I may be able to add to PubMatic and Airbnb at better prices. But I'm very happy with where Floor & Decor trades as of this writing, and I'm reluctant to wait much longer for anything better.