Investing in growth stocks is generally seen as a pathway to riches. However, this category of stocks come with a good dose of risk. Growth stocks have witnessed significant erosion of capital in recent times, especially during times of overall economic or market uncertainty.
So instead of investing only in growth stocks, a better strategy might be to add some value or income-generating (aka dividend) stocks to a growth mix. That way, if some growth stocks don't take off, your bases are covered.
If I have to go with just three stocks to create a balance portfolio, I'd consider two hot growth stocks, SoFi Technologies (SOFI +4.64%), MercadoLibre (MELI +2.97%). The third slot, I'll choose the solid dividend payer, Costco Wholesale (COST +0.82%), a business that still has plenty of growth potential left but with lower risk, and this stock should counteract the two fast growers to form a balanced stock portfolio.
If you have $10,000 to invest right now, you might decide to divide it about equally into these three stocks, giving you more exposure to growth while balancing it with some security. This way, you're on your way to creating a portfolio that could make you rich.
1. SoFi: The bank of the future
SoFi is one of a group of digital banks that flooded the market with low-cost, easy-to-use products as fintech became a household word. But it has done an exceptional job of generating interest, loyalty, and sales growth, and it stands out as customers lap up its services and increase engagement.
In the 2023 third quarter, it once again demonstrated that it can scale while reaching closer toward net profitability. The trajectory is going according to plan despite severe market challenges, boosting investor confidence in its ability to become a force in banking.
Revenue increased 27% year over year, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 121% to $98 million, driven by increases in non-lending segments. It added 717,000 new members for a total of 6.9 million, a 47% increase over last year, and more than 1 million products for a total of more than 10 million.
NASDAQ: SOFI
Key Data Points
Still, Wall Street didn't take kindly to the recent report, perhaps due to the deceleration in revenue growth and continued net losses. SoFi stock is down 17% over the past three months and trades at a price-to-sales ratio of 3.
If annual sales grow 10 times, from $1.91 billion to $19.1 billion, over the next 10 years (or 26% per annum on average, which seems easily doable), and assuming the stock's price-to-sales (PS) ratio stabilizes at around a conservative 1.5 by the end of that period, it would imply a market cap of around $29 billion -- a 338% increase from current values. This implies an average annual return 16%, meaning your investment of around $3,300 could turn into $14,500 in a decade.
2. MercadoLibre: Unstoppable growth
MercadoLibre is the Latin American answer to Amazon, operating a similarly broad e-commerce business serving 18 countries with fast shipping and a new, Prime-like membership program. Unlike Amazon, it's still posting incredibly high growth and is in the early innings of its story.
Consider that after several quarters of consecutive triple-digit sales growth, it's still reporting consistent, high-double-digit growth. Revenue increased 69% in the 2023 third quarter. Its three largest markets, which include Argentina, Brazil, and Mexico, continue to be standout growth drivers, with seemingly endless new opportunities.
The e-commerce business, which drooped a bit in the aftermath of the explosive growth earlier in the pandemic, has reaccelerated, and gross merchandise volume increased 59% year over year in the third quarter. This is due to several factors, notably a consumer trend combining digital and physical store shopping, and vast improvements in its fulfillment network that get products to consumers faster than Amazon -- 80% within two days.
NASDAQ: MELI
Key Data Points
MercadoLibre's fintech services sprung out of a need for underbanked and cash-heavy Latin American customers to be able to find ways to pay for digital shopping. In the third quarter, total payment volume increased 121% year over year, and off-platform growth accelerated in its three largest markets, with a notable 238% increase in Argentina.
This in turn has led to a growing financial services arm that now includes credit products, and MercadoLibre is benefiting from the huge cash influx and net interest income. The credit portfolio reached $3.4 billion with a net interest margin of 37.4%.
It's leveraging tremendous economies of scale, and it's now sustainably profitable with increasing operating margins.
MELI Operating Margin (Quarterly) data by YCharts.
Over the past five years, MercadoLibre grew annual revenue by 57% on an average. It wouldn't be far-fetched to estimate the e-commerce company's revenue to grow by a conservative 31% annually on an average, for the next 10 years, and generate $200 billion in sales at the end of that period. I would posit MercadoLibre has enough revenue drivers to increase its annual revenue to $200 billion, and likewise, its market cap.
This growth rate would imply a market cap of $500 billion in 10 years, at a price-to-sales ratio of 2.5. (Amazon, a more mature company, still sports a PS ratio of 2.75.) That'd turn your $3,300 investment today into about $21,400 in 10 years, generating an annual return of 20.6% for your investment.
3. Costco: Growth, value, and dividends
Finally, Costco is an oldie but goodie that seems to barely break a sweat as it generates unbeatable membership and loyalty and dominates physical retail, especially the warehouse model.
The membership model itself is compelling. The process involves charging a membership fee, and then marking up products enough to cover cost of goods sold and related expenses. The resulting low prices attract customers, who fork over the fee annually to benefit from the prices, and the cycle continues. The fee goes straight to the bottom line, and as membership grows, so does net income.
NASDAQ: COST
Key Data Points
Costco reported some of its best-ever performance when the pandemic started and through the rise of inflation, and even as inflation cooled spending, it still reported record membership increases and traffic.
In the 2023 fiscal fourth quarter (ended Sept. 3), sales began to pick up again, increasing 9.4% over last year. Earnings per share, which were a rare miss in the third quarter due to a charge related to shutting down a shipping service, increased from $4.20 to $4.86. Membership households increased 7.9% over last year, and membership fees rose 13.7%, with fee income increasing from 1.88% to 1.95% as a portion of sales.
What adds to the opportunity is that Costco still has a long growth runway in opening new stores. It's been opening 25 to 30 stores a year, and it's just touching the tip of the iceberg internationally. This perennial market-beating stock also pays a dividend, and it has tons of gas left in the tank to make shareholders rich in the long term. It doesn't have the same growth prospects as SoFi and MercadoLibre, but it has gained 374% over the past 10 years at an average price-to-earnings ratio of 33 while net income increased more than 200% over that time frame. It's likely to be able to triple its annual net income from the $6.3 billion it is today over the next 10 years and lead to a similar stock gain, resulting in your investment becoming $10,000.
These are only three excellent stock picks capable of turning a $10,000 investment into nearly $46,000, or four and a half times the original investment over a decade. But you can take it up a notch and give you the best chance of maximizing gains and lowering risk by buying around 25 stocks and holding for at least 10 years.
