Building a great stock portfolio is similar to building a great basketball team: You need more than just a single superstar. In fact, the best teams rely on utility players who will do the unglamorous but essential tasks like rebounding and playing defense.
The same is true when constructing a stock portfolio. Choosing only risky growth stocks is a recipe for disappointment. Instead, investors should diversify.
With that in mind, here's how I would build a hypothetical $50,000 stock portfolio today.
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1. Mastercard
To extend my basketball team analogy, I'm starting off with an unheralded pick that will stuff the stat sheet, rather than the highlight reel.
Mastercard (MA 0.07%) is one of the best-performing stocks of the last 10 years, with a total return of 470%. A $10,000 investment in the company's stock 10 years ago would have grown to $57,000 today. That's a compound annual growth rate (CAGR) of more than 19%. That's significantly better than the S&P 500's 11.6% CAGR over the same period.
MA Total Return Level data by YCharts
The company, which operates one of the world's largest payment processing networks, boasts stunning fundamentals:
- Operating margin of 59%
- Return on equity of 170%
- Revenue growth of 14%
Powering this financial juggernaut is a vast network of credit, debit, and pre-paid cards. In the third quarter, Mastercard reported over 3.2 billion cards in circulation worldwide. Total transactions in the quarter rose 15% year over year to more than 37 billion.
This immense payment network constitutes a significant moat for Mastercard. Consumers know, like, and trust the brand. Financial institutions want to keep their clients happy. Merchants want to make transactions as seamless as possible.
In summary, there's every reason to believe Mastercard will continue delivering excellent returns for shareholders for years to come -- even if it continues to fly under the radar of many investors.
2. Shopify
Next up, I'm selecting a rookie that has been known to run hot and cold: Shopify (SHOP 1.11%).
Just as every team needs a solid utility player that does the dirty work, every team also needs a shooter -- a player that can light the nets on fire. Shopify, with its rapidly expanding e-commerce platform, has that potential.
In its third quarter, Shopify reported revenue growth of 25%. Trailing-12-month revenue reached $6.6 billion, and free cash flow increased to $549 million.
The company's platform, which helps merchants facilitate online marketing, sales, and shipping, recorded over $56 billion in gross market value (GMV) sales, up 22% from a year earlier. What's more, well-known, boutique brands such as bareMinerals and Toms operate Shopify storefronts.
Granted, Shopify stock isn't for every investor. Value investors would balk at the company's forward price-to-earnings (P/E) ratio, which is north of 60.
Nevertheless, for growth investors willing to buy and hold, Shopify looks worthy of a spot on the team.
3. Microsoft
Finally, it's time to talk about the final pick -- the superstar. Every team needs one, be it Michael Jordan, Wilt Chamberlain, or LeBron James. And when it comes to superstar stocks, my choice is simple: It has to be Microsoft (MSFT 1.82%).
That's because Microsoft has everything a portfolio needs -- all in one stock. The company's assorted business segments include cloud services, gaming, personal computing, and more. Moreover, Microsoft boasts one of the best management teams around, and is once again closing the gap with Apple to become the country's largest company by market cap.
AAPL Market Cap data by YCharts
Yet, despite its enormous size, Microsoft is growing by leaps and bounds. In its most recent quarter (the three months ending on Sept. 30, 2023), the company recorded 13% revenue growth. Its operating margin increased to 48% -- a 20-year high.
In short, this giant is firing on all cylinders. Long-term investors would be wise to notice and consider Microsoft the superstar stock it is.
