Over long periods, Wall Street is a wealth builder for patient investors. But when examined over shorter timelines, directional stock movements are about as predictable as a coin flip.
Since the start of 2021, we've watched the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite rocket to record-closing highs, plunge into a bear market, and now reenter respective bull markets, based on one definition: a 20% (or greater) rally following a bear market decline of at least 20%.
Yet in spite of this strong rally through the first nearly seven months of 2023, the major U.S. indexes are still well below their all-time highs. In other words, bargains still abound for investors willing to seek them out.
Image source: Getty Images.
The best news for bargain hunters is that you don't need Warren Buffett's wallet to grow your wealth on Wall Street. Most online brokerages have shelved minimum-deposit requirements and commission fees, which means any amount of cash -- even $300 -- can be the perfect amount to put to work right now.
If you have $300 that's ready to invest, and you're positive you won't need this cash to pay bills or cover emergency expenses, the following three stocks stand out as no-brainer buys right now.
Visa
The first surefire buy with $300 at the moment is industry-leading payment processor Visa (V -0.23%).
Arguably, the biggest worry for current and prospective Visa shareholders is the likelihood of the U.S. economy falling into a recession. The Federal Reserve Bank of New York's recession-probability tool, which analyzes the spread (difference in yield) between a three-month Treasury bill and 10-year Treasury bond, suggests a 67.31% chance of a recession by June 2024. That's the second-highest reading in the last 40 years, and a pretty clear indication that economic weakness is likely.
Most financial stocks are cyclical, which means they struggle when the U.S. economy struggles, and they thrive when the economy is firing on all cylinders. A recession usually leads to consumers and businesses paring back their spending, which isn't the best news for a company that generates revenue from merchant fees.
But there are two sides to this story. Although recessions are an inevitable part of the economic cycle, they're relatively short-lived. The 12 recessions that have occurred after World War II have lasted just 2 to 18 months. By comparison, periods of expansion usually last for years, if not a decade. This means Visa spends considerably more time benefiting from spending expansion than navigating choppy waters.
To add, the U.S. personal savings rate (4.6% in May) is near a 15-year low, while total household credit card debt is at an all-time high. With an above-average inflation rate, consumers have been more willing to use credit cards to cover their expenses and discretionary purchases. That's also a positive for Visa.
As I've noted previously, Visa has avoided the temptation of lending and has focused entirely on payment facilitation. This conservative approach means the company has no concerns about loan losses or delinquencies when the economy weakens. Not having to set aside capital to cover loan losses is a powerful competitive edge that it uses to bounce back faster from periods of weakness than most financial stocks do.
Lastly, don't forget about Visa's international opportunity. Most emerging markets remain underbanked, which should allow it to organically or acquisitively enter these regions in the years to come. Emerging markets are the company's key to a sustained double-digit growth rate.
American Eagle Outfitters
A second stock that's nothing short of a no-brainer buy for opportunistic investors with $300 is retailer American Eagle Outfitters (AEO 6.32%).
At the moment, few industries are as disliked by investors as apparel retailers. Historically high inflation, including big increases in freight/shipping costs, have weighed on clothing retailers big and small. When coupled with the growing expectation of economic weakness, most investors have been expecting growth rates for apparel and accessories retailers to taper.
When American Eagle reported its fiscal first-quarter results for the April-ended quarter, we did, indeed, see the company's full-year outlook weaken. An uncertain macro environment, along with higher inflation, led to an updated outlook that calls for revenue to be flat to down by low single digits in fiscal 2023. That compares to a prior forecast of flat to low-single-digit sales growth for the year.
While this outlook is disappointing, it's not a game changer for American Eagle Outfitters. Although the company is cyclical and will ebb and flow with the U.S. economy, it does possess competitive edges that should help it outperform most apparel retailers.
One of the biggest advantages it brings to the table is its inventory management. All retailers eventually end up with inventory that doesn't sell as expected. American Eagle Outfitters just happens to be better than most at moving its unwanted merchandise and selling products at or near full price. Prudently managing inventory levels gives the company a margin lift over its peers.
And its digitization investments are paying off. Even though two-thirds of its sales still originate from its physical stores, direct-to-consumer revenue has grown by an annualized average of 13% since 2016.
The company's intimate apparel brand Aerie has been growing like wildfire, with 12% higher sales in the fiscal first quarter. A modest expansion of Aerie's physical-store footprint in the coming years should fuel steady sales growth.
A forward price-to-earnings ratio of 12 is a fair price to pay for an excellent apparel business.
Image source: Getty Images.
Bank of America
The third no-brainer stock to buy with $300 right now is none other than money-center behemoth Bank of America (BAC -0.21%), perhaps better known as BofA.
The headwinds impacting BofA are pretty similar to Visa's. Bank stocks are cyclical, which means the possibility of economic weakness would lead to higher loan/credit delinquencies and charge-offs.
The other potential concern for Bank of America is the crisis of confidence we witnessed earlier this year in regional banks. Though this turbulence appears to have been short-lived (it's been nearly three months since a big-name bank failure), there are clear concerns from Wall Street that bank balance sheets might not be as rock-solid as they appear.
Despite these short-term concerns, Bank of America has three well-defined catalysts that make it a clear-cut buy for patient investors.
To start with, it is the most interest-sensitive money-center bank in the United States. The Federal Reserve's rate-hiking cycle, which has been its most aggressive in four decades, is lining BofA's coffers with added net-interest income. Every rate hike is helping the company collect extra income on outstanding variable-rate loans.
Another reason BofA can outperform are its digital initiatives. As of June 30, 74% of consumer households had adopted online or mobile banking. Even more important, 51% of total sales during the June-ended quarter were completed digitally.
Online and mobile-based transactions cost just a fraction of what in-person and phone-based interactions run. For Bank of America, these digital investments are resulting in improved operating efficiency.
The third catalyst is simply BofA's valuation. It's trading just a touch above its book value and can be purchased for less than 11 times Wall Street's consensus earnings in 2023. Being able to buy top-tier bank stocks near their book value has, historically, been a smart move.
