To bake a pie, you need certain ingredients, including a filling, a crust, sugar, and spices. Using a recipe and some kitchen know-how, anyone can turn apple, flour, sugar, and cinnamon into something different: an apple pie.
Investing works the same way. Any great portfolio contains certain essential ingredients, which, when combined, make the portfolio more than just the sum of its parts. They complement each other, turning individual stocks into a diversified portfolio that can build wealth for a lifetime.
With that in mind, let's imagine how to construct a hypothetical $50,000 portfolio using just three stocks.
Image source: Getty Images.
1. Visa
Let's start with the "pie crust" -- a large, dependable stock with a straightforward business model and a long track record of success: Visa (V 0.97%).
NYSE: V
Key Data Points
This payments-processing company is a giant with a market cap of $543 billion, making Visa America's 10th-largest company. In fact, Visa is the world's largest fintech company -- bigger even than the world's largest bank, JPMorgan Chase.
Visa's enormous size is thanks to its monumental payment network. The company processes an astounding number of payment transactions on its sprawling network. In the fourth quarter alone (the three months ending on Sept. 30, 2023), Visa reported $3.2 trillion in payment transactions on its network. To put that another way, that's slightly more than the annual gross domestic product of France -- in just three months.
Obviously, Visa doesn't record anywhere near that figure in terms of revenue or profit -- these are just payments that it processes from one party to another. The company does, however, apply a fee to these transactions, which is how it generated the bulk of its $8.6 billion in revenue in its last quarter.
Moreover, both transactions and revenue are rising year over year. Transactions jumped by 9%, while revenue increased by 11%.
And thanks to Visa's asset-light business model, much of its revenue is converted into profit. The company reported $4.7 billion in net income, and its profit margin stands at a hefty 53%.
To sum up, a portfolio with Visa in it will have stable growth and profit. That's a good way to get started.
2. Palantir Technologies
Next, our hypothetical pie/portfolio needs some sugar and spice. And, at the moment, there's nothing sweeter or spicier than artificial intelligence (AI). That's why I'm going with Palantir Technologies (PLTR 0.38%).
NASDAQ: PLTR
Key Data Points
The company is a leader in the field of big data analytics. That means Palantir helps organizations get a grip on their own data.
This might seem simple -- even silly -- but it's a real problem for many large organizations that are awash in data. Many organizations produce more data -- from employees, customers, and suppliers -- than they can process or truly understand. Palantir helps these organizations by using its AI-based data analytics tools to recognize patterns and offer suggestions to its customers.
Financially, Palantir is thriving as the market for big data analytics takes off. In its most recent quarter (the three months ending on Sept. 30, 2023), the company reported $558 million in revenue -- up 17% from a year earlier. Gross profit margin increased to a record high of 81%, and 12-month free cash flow also hit a record high of $475 million.
PLTR Gross Profit Margin data by YCharts
Granted, Palantir isn't a stock for every portfolio. Its high valuation (shares trade at a forward price-to-earnings multiple of 57x) will rule it out for value-seeking investors.
However, for those looking to add a spicy dose of AI-driven big data analytics to their portfolio, Palantir is a stock worth considering.
3. Microsoft
Finally, let's talk about the "pie filling": the item that gives the whole portfolio its character. For me, this choice is simple: It's Microsoft (MSFT 1.15%).
NASDAQ: MSFT
Key Data Points
That's because the company has four things that make it an excellent investment:
- A great business model
- Fantastic management
- Economic tailwinds
- Superb fundamentals
As for its business model, Microsoft is more like three or four companies in one. It has a booming cloud services segment, one of the world's largest gaming businesses, and an iconic software division.
It's led by Satya Nadella, who in my opinion is one of the world's top five CEOs. During his almost 10-year tenure at the helm, Microsoft stock has increased by more than 1,200%.
MSFT Total Return Level data by YCharts
The company is a leader in software innovation, including AI development. What's more, it has an extremely close partnership with OpenAI, the company behind ChatGPT.
Finally, its fundamentals are outstanding. Over the last 12 months, the company generated $218 billion in revenue and $77 billion in net income.
In summary, Microsoft makes an excellent cornerstone to just about any stock portfolio.
