It really doesn't matter how much money you invest. Setting aside just $50 per month can grow to $1 million. That's how much money you'll have if you keep investing for 50 years and earn 10.5% per year on average. That's only slightly higher than the historical rate of return of the broad market.
That's the power of compounding, and all you have to do to make it work for you is hold shares of growing companies, ignore the short-term ups and downs of the markets, and let time work its magic.
To give you some ideas of companies that are trending in the right direction, consider DR Horton (DHI 0.78%), Five Below (FIVE -0.51%), and Skechers (SKX 11.20%). Here's why three Motley Fool contributors believe now is the right time to buy these top stocks.
Buffett's new favorite
Jeremy Bowman (D.R. Horton): Berkshire Hathaway's latest 13-F filing revealed three new buys, and they were all homebuilders, including D.R. Horton, Lennar, and NVR.
It's no surprise that Buffett's conglomerate sees value in these stocks. Homebuilders are cranking out huge profits as mortgage rates have soared, leading to unusually low housing inventory -- Americans who took advantage of low mortgage rates during the pandemic don't want to give those up.
That trend seems unlikely to change anytime soon as the Fed is still eyeing another rate hike later this year, and there is an estimated shortage of 4 million homes in the U.S.
While homebuilder stocks are all subject to similar market forces, D.R. Horton is a good stock to start with if you're new to the sector. It's the largest homebuilder in the country with a market cap of around $42 billion, which gives it scale advantages that smaller builders don't have.
Its recent results have also been strong. Revenue rose 11% to $9.7 billion in the fiscal third quarter (ended June 30) as the number of homes closed increased 8% to 22,985.
Even better, as a sign of demand, net sales orders jumped 37% to 22,879 homes. The company is also generating wide profit margins with $1.8 billion in pre-tax income, which equals an 18.3% margin.
It raised its guidance for the year and is aggressively buying back stock, repurchasing 3.1 million shares for $342.9 million in the most recent quarter.
Currently, the stock trades at a price-to-earnings ratio of 8.3, which looks like a bargain price for a stock that should benefit from tailwinds in the tight housing market over the coming years.
Growing discount store
John Ballard (Five Below): Over the last year, retailers have faced the challenge of balancing inventory with lower demand as consumers tighten their wallets. Sales weakened for many companies last year, and with the possibility of an economic recession still hanging in the balance, investors should be selective about what stocks they buy right now.
There are still attractive growth opportunities in retail stocks, but some are better positioned to deliver market-beating returns than others. One of those is Five Below. The stock has already climbed over 1,000% from its 2012 initial public offering price, but it has more long-term upside as it continues to open new stores.
As its name implies, Five Below offers an assortment of products at mostly $5 or below, and it targets tweens and teens. Selling things like electronics, candy, games, and toys at deep-value prices is ideal in this economic climate.
While comparable sales dipped 2% in fiscal 2022, Five Below is off to a stronger start in fiscal 2023 with comp sales up 2.7% year over year in the fiscal first quarter.
The concept has been enormously successful in expanding across urban and semirural areas across the U.S., which points to an enormous opportunity to open new stores across the country. Management is targeting over 3,500 stores over the long term, up from 1,340 at the end of fiscal 2022.
Five Below has delivered double-digit growth in revenue and profits for most of the last decade. The stock has crushed the market's average return over the last decade too, and should be worth a lot more in another 10 years as it continues to expand its store footprint.
Gaining momentum with its strong, niche brand
Jennifer Saibil (Skechers): Skechers is a budget alternative to premium activewear brands like Nike and Lululemon Athletica, but it's managed to make its second-class status fun, funky, and appealing to consumers. It has recruited its own celebrity endorsers like singer Doja Cat and golf champion Matt Fitzpatrick that amplify its brand, and its popularity is growing along with revenue and earnings.
In the 2023 second quarter, revenue increased 7.7% year over year to $2 billion, and earnings per share (EPS) rose 69% to $0.98. The company is seeing particular momentum in its direct-to-consumer channels, which grew 29%, and international sales, which increased 18%. The direct-to-consumer business fueled a higher gross margin of 52.7% and trickled down to EPS, which soundly beat Wall Street's average expectation of $0.54.
Skechers has its own loyal customers, but its budget-friendly prices are attractive to even more shoppers when people are watching their wallets. That gives it resilience under inflationary conditions on top of enjoying growth when the economy is strong. This kind of economy gives new customers a chance to sample Skechers footwear and athletic apparel, and it gives Skechers the opportunity to turn them into repeat customers. The strong showing in direct-to-consumer not only leverages strong profit levers, but it enforces brand loyalty. As trends move in that direction, Skechers' future potential is even more attractive. Management is guiding for 2023 sales of about $8 billion and EPS of $3.33 at the midpoint, implying 8% and 40% year-over-year growth respectively, an excellent showing considering the retail environment.
Skechers stock is up 24% this year, and it continues to beat the market. At the current price, shares trade at a price-to-earnings ratio of 17, which makes the stock look undervalued considering its performance, potential, and earnings generation. If you have $300 to invest today, Skechers is a great option.
