I don't know how much $500 is to you personally, but I do know it's a lot of money to many people.
According to research by The Motley Fool, the median annual family income in the U.S. was almost $70,000 in 2021, which works out to about $5,800 per month. Let's say the median family saved 10% of monthly income for investing in stocks -- a percentage worthy of applause. For such a money-smart family, $500 would almost be an entire monthly investment.
With this in mind, I'm treating a $500 investment as one whole position in a diversified portfolio -- if you invest the Motley Fool way, you'll be looking to build a portfolio of at least 25 companies. And buying stocks during a pullback like right now (the S&P 500 is down 17% from its all-time high) is a great time to do it.
However, rather than shortchange you with just one idea for your portfolio today, I'll be giving you three different ideas: equipment-rental company United Rentals (URI 2.76%), furniture company Lovesac (LOVE 6.49%), and online education platform Udemy (UDMY 3.87%). And each idea could serve a different purpose in a portfolio.
1. United Rentals: The safe dividend-growth opportunity
If I were starting out today, I would want to begin by laying a strong foundation for my portfolio. And United Rentals is the kind of company that can be foundational, in my opinion.
It has a long history of market-beating returns. And it just started paying a dividend, leaving plenty of room to grow it in the future.
According to management, United Rentals finished 2022 with 17% market share in the equipment-rental space in North America with nearly 1,500 locations. It has over 1 million equipment units (backhoes, water pumps, scissor lifts, and more), which are valued at nearly $20 billion. That scale is hard to replicate and gives it a competitive advantage.
As long as people need equipment to do jobs, United Rentals has a reliable business. Moreover, it has a very profitable business: It has generated positive free cash flow in 17 of the past 20 years. And management expects more than $2 billion in free cash flow in 2023, which should be around a 15% margin.
Management has options for its cash flow, including acquiring other companies and repurchasing shares; it frequently does both. But it also just started using some of its cash to pay a quarterly dividend of $1.48 per share. For perspective, that's only about 20% of its earnings, leaving plenty of room to increase the dividend in the future.
And if United Rentals isn't up your alley, don't worry: There are other safe, dividend-growth opportunities out there for laying a strong foundation in your portfolio.
2. Lovesac: The profitable growth company
United Rentals' revenue is up around 66% over the past five years. But that doesn't hold a candle to Lovesac's revenue growth of more than 400% during this time. The company's high-quality beanbag chairs and sectional couches are increasingly in demand.
And high margins allow it to turn a profit while it grows. This is a great kind of company to add to a portfolio as you build beyond your foundational stocks.
On the surface, one would think that Lovesac is just another furniture company. But it has some important distinctions. Nearly 90% of sales come from its sectional couches, called Sactionals. And this has many advantages for the business.
For starters, Lovesac is constantly updating its Sactionals. In 2021, it released its StealthTech technology, which provides immersive sound and wireless charging for phones. In a brilliant move, management makes all new Sactional add-on products backward compatible so existing customers can spend more over time. In this way, Lovesac can extract more lifetime value from its customers than many of its peers can.
Moreover, it has advantages because all Sactional sections are uniform in size. Showrooms need little space to demonstrate how to configure them in multiple ways. Inventory stacks nicely in the back. And e-commerce orders -- about one-quarter of sales -- ship easier than typical bulky furniture. This helps Lovesac showrooms have a payback period of under one year, which is very important for retail companies with physical stores.
Lovesac's unit economics support its profitability. It earned $28 million in net income in its recently completed fiscal 2023 and expects $30 million to $36 million in its fiscal 2024.
And the company still has great revenue growth prospects. It has 195 showrooms right now but plans to more than double its store count over the next five years. Assuming the popularity of its products continues, this profitable growth stock could outperform the average for the S&P 500.
3. Udemy: The speculative stock with a high upside
According to third-party research group Arizton, the market size for e-learning is around $214 billion worldwide. But this is expected to surpass $475 billion by 2027. And it's clear that much of this spending will come from businesses looking to increase their workers' skills. HR media platform People Matters estimates that corporate e-learning could be a $370 billion market.
So Udemy has an enormous runway for growth, considering that annual recurring revenue (ARR) for its enterprise segment was only $372 million at the end of 2022.
Udemy's education content is generated by users, not the company. It is merely the distribution platform connecting educators with anyone who wants to learn. User-generated content businesses typically have good margins. And indeed, Udemy's gross margin is 56%.
Udemy is not profitable; it had a net loss of $154 million in 2022. But there's a simple reason to hope the company quickly turns this around. Its enterprise segment has a more robust gross margin of almost 67%. And this part of the business is growing faster than the business as a whole.
As a whole, revenue was only up 22% year over year in 2022. But ARR for its enterprise segment was up 57%. Projecting this rapid growth forward, Udemy's gross margin should creep higher, potentially improving its bottom line substantially, which could make this a winning investment.
On the flip side, Udemy might never turn the corner on profits. And if it doesn't, chances are slim that it will enrich shareholders. That's why Udemy (and other promising tech stocks that are still unprofitable) might be best to buy only after you've built your portfolio around 25 or more companies that have higher chances of positive returns, like United Rentals and Lovesac.
However, considering it trades at less than two times trailing sales, I'd say now is an opportune time to take a chance on Udemy. There are risks with this stock, but at least the valuation risk is minimal here.
Personally, my retirement portfolio is already quite large with over 30 stocks. And that's why of these three companies, Udemy is the one I'd consider buying today. But I believe all three could be good investments from here.