Building a fantastic investment portfolio requires the right recipe. In the same way a master chef must balance sweet and sour, acid and fat, a portfolio manager must balance growth and value, potential and certainty.
So let's imagine a hypothetical scenario: You have $50,000 to invest across only three stocks. While this doesn't strictly adhere to The Motley Fool's philosophy of investing across 25 or more stocks, it's still a worthwhile thought experiment.
Here's how I would do it.
Image source: Getty Images.
1. Amazon
First up, I'm allocating $20,000, or 40% of my portfolio, to Amazon (AMZN 3.43%). Indeed, if I could only invest in one stock, it would be Amazon. That's because the company's blend of businesses (e.g., cloud services, digital advertising, and e-commerce) give it built-in diversification -- meaning my three-stock portfolio will have exposure to multiple sectors within the economy.
What's more, Amazon's track record of innovation gives me confidence the company will continue to adapt to the times. After all, the company that started as an online bookstore has -- shall we say -- slightly evolved from that initial vision.
Finally, with a price-to-sales (P/S) ratio of only 2.4, Amazon shares are affordable when compared to the not-too-distant past. As recently as 2020, its shares traded at a P/S ratio of 5.6. The 10-year average P/S ratio for Amazon is 3.1.
2. Duolingo
If Amazon is the hearty base in my recipe, Duolingo (DUOL 3.64%) is the spice. And as is the case for most spices, you don't want to overdo it. So, I'm allocating $7,500, or 15% of my hypothetical $50,000 portfolio, to Duolingo shares.
Duolingo operates a language-learning app and website, with over 20 million daily active users (DAUs) and almost 5 million subscribers.
The company, which debuted via initial public offering (IPO) in 2021, is laser-focused on growth at this stage. That means its key metrics are user, subscriber, and revenue growth. And Duolingo is bringing home the bacon when it comes to those stats.
Highlights from the company's latest quarter (ended on March 31) include:
- 42% year-over-year growth of revenue
- 62% increase in daily active users from a year ago
- 63% increase in paid subscribers versus 2022
Like most early-stage growth stocks, Duolingo shares are volatile, and they're not for every investor. But because of its solid growth and eye-catching app, Duolingo gets my nod for this hypothetical portfolio.
3. Tesla
Lastly, every great meal needs a star ingredient -- the showcase element that lends the dish its character. And in this hypothetical portfolio, it's Tesla (TSLA -1.11%). I'm allocating $22,500, or 45%, to the electric vehicle (EV) maker.
Why Tesla? In a nutshell, it comes down to its combination of proven success and sky-high potential. Let's start with the proven success. On that front, Tesla is already the largest automaker by market capitalization. Its $775 billion valuation dwarfs competitors like GM ($50 billion) and Ford ($55 billion).
What's more, those same competitors are rushing to sign deals to use Tesla's network of superchargers. It's simply another example of how Tesla is ahead of the competition. Tesla should enjoy a slight revenue boost from non-Tesla vehicles "filing up" on the company's charging network.
But the real appeal of owning shares of Tesla is the incredible upside of this as-of-yet unrealized innovation. If the company can deliver on its promise to make full self-driving (FSD) cars and robotaxis a reality, Tesla's valuation could skyrocket.
In short, I want to own shares now because of the EV adoption that's coming in the next decade, and I want to own shares 10 years from now due to FSD, robotaxis, and whatever other innovations Tesla might devise.
