Over the past 17 months, Wall Street has taken investors on quite the ride. After the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite surged to record highs between mid-November 2021 and the first week of January 2022, all three indexes plummeted into a bear market. And despite sizable bounces off their 2022 lows, the Dow, S&P 500, and Nasdaq remain well below their all-time highs.
While traders might view this as a challenging environment, long-term investors see bear markets as an opportunity. Over extended periods, every sizable correction in the Dow, S&P 500, and Nasdaq Composite has eventually been wiped away by a bull market. Though we’ll never know the timing of these events in advance, history pretty conclusively shows that buying high-quality stocks during these downturns is a smart move.
One of the best aspects of putting your money to work on Wall Street is that most online brokers have done away with minimum deposit requirements and commission fees. It means any amount of money — even $500 — can be the perfect amount to invest.
If you have $500 ready to put to work and are confident you won’t need this money to pay bills or cover emergencies, the following three stocks stand out as no-brainer buys.
Berkshire Hathaway
The first longtime winner that makes for a no-brainer buy with $500 right now is conglomerate Berkshire Hathaway (BRK.A) (BRK.B). Though Berkshire isn’t quite a household name, its CEO, billionaire Warren Buffett, is widely considered to be one of the greatest investors of all time.
To state the obvious, past performance is no guarantee of future results. However, Warren Buffett has led his company’s Class A shares (BRK.A) to an annualized return of 19.8% over 58 years. That’s double the annualized total return, including dividends, of the S&P 500 (19.8% versus 9.9%).
One reason Berkshire Hathaway stock has been such a surefire winner for patient investors is Buffett’s love of cyclical businesses. A company that’s cyclical ebbs and flows with the U.S. economy.
Despite recessions being a natural part of the economic cycle, periods of expansion last considerably longer than downturns. Warren Buffett and his investment team know this. Rather than trying to time when recessions will occur, Berkshire Hathaway’s investment portfolio and owned assets are packed with cyclical companies that benefit from disproportionately long periods of economic growth.
Another reason investors can count on Berkshire Hathaway is the Oracle of Omaha’s penchant for investing in dividend-paying companies. Publicly traded stocks that pay a dividend are almost always profitable on a recurring basis and offer transparent long-term growth outlooks.
What’s more, studies have shown that income stocks have significantly outperformed public companies that don’t offer a dividend over multiple decades. In 2023, Berkshire Hathaway is on track to collect north of $6 billion in dividend income.
But perhaps the biggest benefit to investors has been Berkshire Hathaway’s phenomenal capital-return program. Even though Berkshire doesn’t pay a dividend, Warren Buffett and executive vice chairman Charlie Munger have overseen the repurchase of more than $70 billion of Berkshire Hathaway common stock since July 2018. For companies with steady or growing net income, like Berkshire, buybacks can boost earnings per share and make it appear all the more attractive to fundamentally focused investors.
Enterprise Products Partners
A second stellar business that stands out as a no-brainer buy if you have $500 to invest right now is energy stock Enterprise Products Partners (EPD).
For some investors, the idea of putting money to work in anything related to the oil and gas industry is off-limits. The volatility from three years ago, which was caused by COVID-19 pandemic lockdowns, is still fresh in the minds of many.
The thing is, Enterprise Products Partners was largely unaffected by the pandemic thanks to its operating model. Enterprise is a midstream energy company, which is a fancy way of saying that it primarily moves and stores petroleum- and gas-based products. According to the company, it owns over 50,000 miles of transmission pipeline and can store over 260 million barrels of liquids and refined product.
Whereas oil and gas drilling companies are directly impacted by wild vacillations in the underlying spot price of energy commodities, midstream providers like Enterprise Products Partners primarily rely on long-term, fixed-fee contracts. This type of contract removes the impacts of inflation and spot-price changes and provides energy middlemen with exceptionally predictable operating cash flow.
For a company like Enterprise Products Partners, there’s nothing more important than being able to look 12 to 24 months out and accurately forecast its operating cash flow. That’s because it’s constantly outlaying capital for new projects — more than a dozen major projects collectively totaling $6.1 billion are slated to come online between this quarter and the end of 2025 — as well as acquisitions, and its distribution, which has been raised annually for a quarter-century. Enterprise is currently yielding a hearty 7.5%.
The icing on the cake is that disarray in the global energy supply chain is working in Enterprise Products Partners’ favor. Three years of capital underinvestment by global energy majors will make it difficult to meaningfully increase the supply of energy commodities anytime soon. Tight supply is usually good news for underlying spot prices, which should encourage domestic drillers to sign new contracts with Enterprise as they look to ramp up their own production.
PayPal Holdings
The third no-brainer stock to buy with $500 right now is fintech industry leader PayPal Holdings (PYPL).
Shares of PayPal have collapsed nearly 80% over the past two years, with the 2022 bear market reining in richly valued companies. Further, historically high inflation has led skeptics to believe the number of transactions on PayPal’s digital payment networks would slow. However, PayPal is now cheaper than it’s even been as a publicly traded company, and it’s still forecast to grow its annual earnings by an average of nearly 16% over the next five years.
The first sign of strength can be seen in PayPal’s total payment volume (TPV). Even with U.S. gross domestic product shifting into reverse during the first six months of 2022, PayPal delivered double-digit TPV growth, excluding currency movements. It matched this feat, once more, in the first quarter of 2023 by delivering currency-neutral TPV growth of 12%. Even in a generally weak economic environment, the growth trajectory for digital payments remains strong.
But the most intriguing thing about PayPal’s business is the engagement from its active users. As I recently noted, PayPal’s active account holders have increased the number of transactions they’re completing over the trailing-12-month period from 40.9 at the end of 2020 to 53.1 as of March 2023. PayPal is a transaction-driven platform, which means more engagement should lead to an increase in transactions and gross profit for the company.
In addition to funneling cash into a variety of growth initiatives, PayPal’s management team is also being mindful of the uncertain economic environment. The expectation is for the company to have reduced its annual operating expenses by at least $1.3 billion in 2023.
PayPal is also aggressively repurchasing its stock. Last year, the company’s board of directors approved a buyback program totaling as much as $15 billion. When complete, these repurchases should lift PayPal’s earnings per share and make an already cheap stock that much more attractive.
— Sean Williams
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Source: The Motley Fool