Investing $500 doesn't sound like a life-changing proposition, but I like to view it in the context of my 7-year-old daughter. If I invest $500 into the market today for her and add $500 annually, this money could grow to more than $1 million in 55 years, assuming 10% annual returns.
Although some of this money is likely to be used before her retirement -- for college, a house, traveling, and the like -- it nonetheless highlights how a mere $500 can get the compound snowball rolling.
With this perspective, let's look at five stocks that I am confident are magnificent $500 investments for my daughter's custodial account.
1. Sea
As the market leader in a Southeast Asian e-commerce industry that Statista expects to grow by 11% a year through 2027, Sea Limited (SE 0.05%) operates at the heart of what could prove to be a decades-long megatrend. The online retailer, based in Singapore, serves various countries, including Indonesia, Vietnam, the Philippines, Thailand, and Malaysia.
However, Sea is much more than its Shopee e-commerce operations. It's home to Garena, the company's digital entertainment unit housing its hit game Free Fire, and SeaMoney, its fintech business. Sea generated 74% of its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from these segments.
Most importantly for investors, despite revenue only growing by 5%, gross profits surged 33%, an encouraging sign for the young stock. With Shopee and SeaMoney increasing sales by 28% and 53%, respectively, in the most recent quarter, Sea is poised to resume its supercharged growth, especially since Free Fire was recently allowed back into India after being removed due to security concerns.
With a price-to-sales (P/S) ratio of 2, Sea trades near its all-time low of 1.6. With its low valuation, improving gross margins, and potentially reaccelerating growth, Sea is one of my favorite stocks to spend $500 on today.
2. Coupang
While Sea leads the Southeast Asian e-commerce industry, Coupang (CPNG -0.52%) is the leader in the online retail market in South Korea. With roughly 20 million active customers, a figure that grew 10% from last year, Coupang now has nearly 40% of South Korea's population shopping on its platform.
Despite this widespread adoption, the company's growth story is still in its early chapters. Sales growth was 16% in its most recent quarter as it continued to benefit from South Korea's high population density and limited physical retail space, which is just 10% of the size of the United States on a per-capita basis.
Better yet, Coupang is starting to deliver on its promise to generate free cash flow (FCF) as its operations become more efficient after fortressing the country with its logistical network. Thanks to this efficiency, the company generated more than $1.2 billion in FCF in its last three quarters, compared to its market capitalization of $31 billion.
Should Coupang generate similar FCF in its upcoming quarter, the company would be trading at roughly 19 times FCF, an enticing valuation for the growth stock. Management is considering a move into Taiwan, and with the company's logistics and advertising units growing twice as fast as the rest of its e-commerce unit, Coupang is another investment I am confident in adding to for my daughter.
3. Pool
Tied to the notoriously cyclical U.S. housing market, Pool (POOL 0.32%) has seen its shares slide 45% from the all-time highs in 2021.
Rising interest rates, lower consumer confidence, and a decline in new housing starts have the company expecting its pool-construction segment to decrease by 30% in 2023. But what makes Pool a stock I'm confident in buying at these prices is that total sales only dipped 9% in its most recent quarter despite this drop-off in new pool construction.
This is because 83% of the company's revenue comes from nondiscretionary and semi-discretionary sources like do-it-yourself purchases, maintenance services, renovations, and remodels. These recurring purchases are needed to keep pools operational and generally cannot be avoided. This helps to explain how Pool has delivered total returns of 45,000% since its initial public offering (IPO) in 1995.
With the company's P/S of 2.1, well below its five-year average of 2.9 (despite its sales declining slightly), buying Pool in today's challenging times could make a lot of sense looking a decade out.
4. Snap-on
Snap-on (SNA 0.20%) -- a manufacturer of tools, other equipment, and diagnostics for the automotive, commercial, and industrial markets -- might be easy to overlook with an average 6% annual sales growth since the 1990s. But its incredible consistency has let the company easily outpace the total returns of the S&P 500 index over the same time.
SNA total return level data by YCharts; ETF = exchange-traded fund.
Snap-on operates in three segments serving a broad base of customers:
- Commercial and industrial: Tools for the aerospace, energy, military, and other crucial industries.
- Snap-on tools: Any tools you can imagine for automotive technicians.
- Repair systems and information: Automobile diagnostics, repair information software, vehicle lifts, and the like.
What makes Snap-on an excellent investment, however, is its high and rising return on invested capital (ROIC) of 17%. ROIC measures a company's profitability versus its debt and equity, and it has been proven that stocks with higher scores, like Snap-on, tend to outperform their peers.
The cherry on top? Snap-on trades at a mere 14 times earnings, a far cry from the S&P 500's current average of 25.
5. Nasdaq
Most people recognize the Nasdaq (NDAQ -0.28%) brand for its namesake index and massive technology IPOs, but it is quickly becoming a company focused on recurring revenue.
With various technology used for surveillance, fighting fraud and money laundering, regulatory issues, and trade life-cycle management, Nasdaq has become much less reliant upon trading and IPOs for its success.
The company aims to build out these services with its $10.5 billion acquisition of Adenza set to close in the fourth quarter, making Nasdaq a one-stop-shop for its buy-side, sell-side, and banking customers.
Although these are a lot of spinning plates up in the air (with a temporarily higher debt load), the company has generated more than $1.6 billion in FCF over the last year. This leaves Nasdaq trading at 16 times FCF.
NDAQ price-to-FCF data by YCharts.
That is its cheapest valuation of the last five years, so I can't help but feel confident about buying Nasdaq for my daughter as Adenza looks to reignite the stock's growth story, bringing in high-teens growth in recurring revenue.
