The U.S. equity market has been mired in uncertainty over the past few months. Higher-than-expected inflation and interest rate hikes are weighing on investor sentiment. But while many may prefer to stay on the sidelines in this market, keeping money idle is never a good choice at decade-high inflation levels.
Instead, investors can begin by investing a small amount of money in a range of assets and gradually build up a diversified portfolio. In the stock market, even an investment of just $300 is good enough to get you started with several high-quality stocks such as PayPal (PYPL 1.61%), Interactive Brokers (IBKR 1.00%), and Dynatrace (DT 4.24%).
Let's explore why these stocks are attractive picks now.
PayPal
Digital payment leader PayPal flourished during the early pandemic because of booming e-commerce. However, once the economy reopened from lockdowns, shoppers started returning to in-store purchases. Since then, PayPal's top-line and bottom-line growth rates have been moderating back to their long-term norms.
NASDAQ: PYPL
Key Data Points
Although a slowdown in growth may seem painful in the short run, the company is a significant beneficiary of the increasing adoption of alternate payment methods over physical cash. There are also many other compelling reasons that support buying this stock now.
First, PayPal has 435 million active accounts using its platform, including 35 million merchant accounts. The broad network reach drives a virtuous cycle wherein more customers attract merchants and vice versa.
Second, PayPal has been increasingly focusing on improving the checkout experience to retain its share in the branded checkout market. The company has already upgraded almost one-third of its top 100 merchants to its advanced checkout experience.
Third, PayPal has also made rapid progress with its buy now pay later (BNPL) service. Since its launch in 2020, the company's BNPL service has been used to grant around 200 million loans to more than 30 million customers.
Finally, PayPal's cost-cutting initiatives are translating into improved profitability. This is evident considering that while the company has projected 7.5% year-over-year revenue growth, it expects non-generally accepted accounting principles (non-GAAP) earnings per share (EPS ) to be up by close to 24% year over year in 2023.
Interactive Brokers
Online brokerage firm Interactive Brokers is differentiating itself from the competition based on the technological superiority of its automated trading platform (in terms of reliability and speed of executing trading orders, access to a wide range of assets, and overall customer experience) and low trading fees.
NASDAQ: IBKR
Key Data Points
Although many technology companies have reported disappointing or mixed results in the recent quarter, Interactive Brokers has managed to surpass both analyst revenue and earnings estimates in the fourth quarter. Investors opted to trade in stock and index futures and options to manage funds in this period of rising inflation, interest rates, and geopolitical uncertainty. Rising market volatility also attracted new customers to the company's trading platform, and customer accounts rose 25% year-over-year to 2.09 million as of the end of the fourth quarter.
The high-interest environment has also helped Interactive Brokers' financial performance, since it led to an increase in the interest earned on margin loans and segregated funds (cash collateral collected for lending stocks to customers to take short positions). Subsequently, the company posted a very attractive pretax profit margin of 71% in the fourth quarter, up from a 62% margin in the same quarter of the prior year.
Considering the company's inflation-resistant business model and robust profitability, I consider this stock a worthwhile buy now.
Dynatrace
Enterprises have been increasingly migrating data and computing from private servers to hybrid environments (a mix of on-premise and cloud infrastructure) or to the public cloud (or multi-cloud infrastructure). Although the shift to the cloud has resulted in higher resource efficiency for organizations, it has also led to rising complexity of companies' technology stacks.
NYSE: DT
Key Data Points
Dynatrace has been quite successful in leveraging this growing opportunity. The company offers solutions to pinpoint pain points in a client's technology stack and resolve them with the help of artificial intelligence algorithms.
The success of the company, even in the current tough cloud computing market where large enterprises are optimizing their cloud spending, is apparent from its recent quarterly performance. Annual recurring revenue (ARR, an important revenue performance metric for software-as-a-service, or SaaS, companies) grew 25% year-over-year to $1.16 billion in the third quarter of fiscal 2023 (ended Dec. 31). Remaining performance obligations (RPO, a forward-looking revenue metric) grew by 24% year over year to $1.7 billion, while the current portion of RPO (to be recognized as revenue in the next four quarters) grew by 25% year-over-year to $983 million. This is indicative of the company's high revenue growth potential.
Unlike many high-growth SaaS companies, Dynatrace is already profitable and free-cash-flow positive. Coupled with a solid balance sheet ($422 million in cash and insignificant debt), this software stock could prove to be a long-term buying opportunity now.
