The markets have begun heating up in recent weeks, including an excellent rally for technology stocks driven by Wall Street's excitement over artificial intelligence. Now that some stocks have more than doubled since the beginning of the year, investors might need to look a little harder for the market's best opportunities.
But don't worry: I've already done much of that work for you, searching high and low to identify three very different companies with a common link: They offer tremendous potential returns over the coming years from the prices they trade at today.
Here's why these are my three favorite stocks today and what they offer your portfolio.
A flexible e-commerce giant
Yes, Amazon (AMZN 3.43%) has already risen by 50% since the beginning of the year. But I still love this stock today -- just not for the reason you might think.
Most investors focus on its massive e-commerce business, or Amazon Web Services, the cloud platform that powers much of the worldwide web. But I'm looking at the company's Prime subscriber base, with an estimated 200 million users and approximately $40 billion in annual revenue.
Prime is a potential cash cow. Imagine a vast customer base that pays monthly to belong. Since Amazon has so many Prime users, it can offer great products and services cheaply because it can spread the costs out among all its members.
Then, the more Prime offers, the more Amazon can justify charging for it, a lucrative cycle. Members already get e-commerce perks and media streaming. Rumors recently emerged that the company was talking to telecommunications providers about offering them low-cost wireless service, though that's mostly speculation.
AMZN price to CFO per share (TTM); data by YCharts. TTM = trailing 12 months; CFO = cash from operations.
Investors should look for Amazon Prime revenue to grow over the coming years as the company builds value in the program.
The stock remains reasonably valued despite its recent rally. It still trades below its average valuation (using operating profits) over the past decade.
Investors might see shares cool after their recent momentum, but this proven compounder can still generate great returns if given enough time. Analysts believe Amazon will grow earnings per share (EPS) by more than 30% annually over the next several years.
The small, hypergrowth healthcare disruptor
Traditionally, healthcare has been a pretty rigid system that routes patients through doctors' offices and hospitals at the mercy of their insurance company. But Hims & Hers Health (HIMS 1.87%) is giving consumers an alternative for treating certain conditions.
The company offers telehealth services for several conditions, including hair loss and sexual health. Patients can digitally consult a professional and have prescription and over-the-counter medicines shipped to their homes.
The company's blistering execution and growth, together with a cheap valuation, makes the stock appealing today. Hims & Hers has proved to be appealing to patients; it has tripled subscription customers from 412,000 in the second quarter of 2021 to 1.2 million in the first quarter of 2023. Revenue grew by 88% year over year in the first quarter of this year.
Hims & Hers isn't profitable yet under generally accepted accounting principles (GAAP), but it's turning a profit in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) despite spending half its revenue on marketing to fuel growth. The business hit 80% gross margins in its most recent quarter.
Shares are trading at a price-to-sales (P/S) ratio today of 3, which seems silly considering the company's revenue growth and profit margins. For example, the workflow-management company Monday.com has higher gross margins at 87% but is growing revenue by only 50%. However, its stock trades at a P/S of 14!
Is it unreasonable for Hims to trade at a P/S between 5 and 10? Even if the valuation stays the same, growing at such a fast pace should still produce outsize returns over time. Hims & Hers needs to keep picking up subscribers. It has to this point, making it one of my favorite stocks today.
A deep value high-yielder
Next, you will hang a sharp right and drive into deep value territory. I'm talking about the global nicotine company British American Tobacco (BTI -0.51%). The company sells cigarettes, heat-not-burn devices, vapes, and nicotine pouches in the United States and worldwide.
The first thing that jumps off the page is a staggering dividend that yields 8.3% at today's share price. High yields are often a red flag, but British American's dividend payout ratio is reasonable at 62%.
And the company is growing its earnings. Management recently affirmed its 2023 guidance of mid-single-digit growth despite some currency headwinds. In other words, investors should look at roughly 13% to 14% investment returns before factoring in any potential changes to the stock's valuation.
But its valuation is where things get fun. Analysts are looking for earnings of $4.79 per share in 2023, putting the stock at a forward price-to-earnings ratio (P/E) of less than 7. Such a valuation might imply that a company is failing, but that's not true for British American Tobacco.
The market could never give the stock its due respect, and it can still be a good investment. However, investors could be looking at a bona fide market-beater if Wall Street steadily re-rates it higher, say to a P/E of 10 to 14 over time.
