The past two-plus years have been polar opposites for Wall Street. In 2021, stocks could seemingly do no wrong, with the largest correction in the S&P 500 amounting to just 5%. Meanwhile, last year, all three major indexes plummeted into a bear market and delivered their worst single-year returns since the Great Recession more than a decade ago.
While short-term movements in the market can be highly unpredictable, what is a virtual guarantee is that the broad-market indexes increase in value over long periods. Every single correction, crash, and bear market throughout history (excluding the current bear market) has eventually been fully cleared away by a bull market. For patient investors, it means every notable decline in the major indexes is a buying opportunity.
But what’s just as favorable to investors as the stock market’s long-term uptrend is that most online brokerages have done away with minimum deposit requirements and commission fees. This allows everyday investors with any amount of money — even $1,000 — to take advantage of high-quality stocks trading at a discount.
If you have $1,000 that’s ready to be invested and won’t need this cash to cover any bills or emergency expenses, the following three stocks stand out as no-brainer buys right now.
Amazon
The first surefire buy with $1,000 is none other than dominant e-commerce stock Amazon (AMZN).
The reason Amazon lost as much as half of its value since hitting an all-time high was the expectation that online sales would slow due to both the ongoing bear market in stocks and the growing likelihood of a U.S. recession. Amazon’s operating results have, indeed, shown stagnation in online retail sales.
However, Amazon’s leading segment for revenue isn’t all that important when it comes to cash-flow generation and operating income. E-commerce is a generally low-margin operating segment that serves a more important purpose as a jumping-off point to the ancillary segments that generate the bulk of its cash flow and profits.
Amazon Web Services (AWS), the company’s cloud infrastructure services segment, is a far more important piece of the puzzle than its leading online marketplace. Based on estimates from tech analysis company Canalys, AWS brought in 32% of all cloud infrastructure service spending during the fourth quarter.
Enterprise cloud spending is still in its early innings of growth, which should give AWS a lengthy runway of double-digit sales growth. Even though AWS generates about a sixth of Amazon’s net sales, it’s consistently responsible for 50% to 100% of the company’s operating cash flow.
The popularity of Amazon’s low-margin online marketplace has also been the springboard for the success of its subscription services segment. In April 2021, Amazon announced it had surpassed 200 million global Prime subscribers. With modest growth in its marketplace since then, along with gaining the exclusive rights to Thursday Night Football, it’s extremely likely the company’s subscriber count has continued to climb.
The point is that even if Amazon’s online retail sales stagnate or fall, it could still deliver sustained, double-digit cash flow growth thanks to its higher-margin ancillary operations. Since Amazon reinvests most of its cash flow back into its business, cash flow is a better measure of “value” than the traditional price-to-earnings (P/E) ratio.
Right now, Amazon is cheaper than it’s ever been relative to Wall Street’s future cash flow projections for the company.
Mastercard
Another no-brainer stock you can buy right now with $1,000 is payment processor Mastercard (MA).
Interestingly, one of Mastercard’s biggest headwinds and tailwinds are one and the same: It’s a cyclical company. Cyclical stocks excel when the U.S. or global economy are thriving and struggle during periods of recession. For Mastercard, the growing prospect of a U.S. recession would likely reduce consumer and enterprise spending, which can impact the fees it collects from its merchants.
But being cyclical has its advantages. Every recession after World War II has lasted just two months to 18 months. By comparison, economic expansions are pretty much always measured in years. One of the reasons Mastercard fares so well over the long run is that the U.S. economy spends a disproportionate amount of time expanding.
It certainly doesn’t hurt that Mastercard holds the enviable No. 2 position in U.S. credit card network purchase volume. According to Securities and Exchange Commission (SEC) filings in 2021 from the four major payment networks, Mastercard accounted for a 23.7% share of network purchase volume in the U.S. — the top market for consumption worldwide.
However, the international opportunity for Mastercard is even more fruitful. Cash still accounts for a sizable percentage of global transactions, which gives Mastercard a multi-decade runway to organically expand its payment infrastructure or to make acquisitions in order to infiltrate underbanked emerging markets.
Investors can also take solace in the fact that Mastercard’s management team continues to conservatively run the business. Despite being confronted with a constant dangling carrot, management has chosen not to become a lender. Although this means giving up the potential for net-interest income and fees, it also ensures that Mastercard won’t be exposed to delinquencies and loan losses when inevitable recessions do occur.
This simple decision to stick with what Mastercard is best at has kept profit margins consistently above 40% and helped the company rebound from downturns exceptionally quickly.
Berkshire Hathaway
The third no-brainer stock to buy with $1,000 right now is conglomerate Berkshire Hathaway (BRK.A) (BRK.B). This is the company run by well-known billionaire investor Warren Buffett. I should note that I’m specifically talking about the Class B shares (BRK.B), since each Class A share (BRK.A) will set you back close to $478,000.
Like all new and tenured investors alike, Warren Buffett and his team are fallible and capable of being wrong. But the magnitude of their correct investments has far outweighed any mistakes they’ve made since the mid-1960s. Since the Oracle of Omaha became CEO, Berkshire Hathaway’s Class A shares have produced an annualized return of 19.8% for the company’s shareholders. That’s double the annualized total return, including dividends, of the S&P 500. In other words, beating Wall Street has been commonplace for decades.
There are a number of reasons for Berkshire Hathaway’s overwhelming success. Some are thanks to Warren Buffett. For example, the Oracle of Omaha’s long-term ethos has allowed a handful of Berkshire’s initial investments to compound over time.
Another catalyst for Berkshire is that Buffett and his investing team tend to gravitate toward cyclical businesses. Rather than trying to time when recessions or bear markets will occur, the Oracle of Omaha has realized that it’s far more beneficial to have his investments in place to take part in the disproportionately long periods where the U.S. and global economy are expanding.
There’s also Berkshire Hathaway’s unsung heroes: its dividend stocks. If the company’s investment portfolio were to remain unchanged throughout 2023, Berkshire Hathaway would collect more than $6.1 billion in dividend income. Dividend stocks are almost always profitable, and they’ve substantially outperformed nonpaying stocks over long periods.
Lastly, Berkshire Hathaway has an impressive capital-return program. Although it doesn’t pay a dividend, Warren Buffett and executive vice chairman Charlie Munger have given the green light to $66 billion worth of share repurchases since July 2018. These buybacks can help lift earnings per share to make Berkshire stock even more attractive to fundamentally focused investors.
— Sean Williams
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Source: The Motley Fool