Dicey market conditions make people hesitant to put more money into stocks because they don’t want to invest just before the bottom drops out. But actually, you should always be steadily adding more money to your portfolio, and taking advantage of downturns when they arise.
The U.S. market has been through plenty of corrections, bear markets, and crashes — so far, after every one of them, it has regained its lost ground and then powered even higher. That overall pattern of growth is why investors don’t need to start off with a lot of money to make significant returns over the long haul — they just need to get in the market and stay invested. We asked three of our contributors to name a stock they think looks particularly promising now. Their picks: Activision Blizzard (NASDAQ:ATVI), Dutch Bros (NYSE:BROS), and SoFi Technologies (NASDAQ:SOFI).
This company can power next-level performance
Keith Noonan (Activision Blizzard): No matter what happens in the world, it’s a safe bet that people will retain their appetite for entertainment. And if you’re looking to benefit from the public’s growing demand for media content, there’s no medium with a better long-term outlook than video games. Within that category, few companies are better positioned than Activision Blizzard.
Activision Blizzard has an incredible collection of video game properties and development studios, and there’s a good chance that it will be able to continue releasing new hits that power strong sales and earnings growth. With blockbuster series including Call of Duty, World of Warcraft, Candy Crush Saga, and StarCraft, the publisher has one of the strongest stables of gaming properties in the industry.
The company’s recently released remaster of Blizzard’s 2000 hit Diablo 2 appears to be off to a great start, sales-wise, and its performance speaks well to the strengths of the company’s catalog. In addition to creating entirely new sequels, Activision Blizzard has also shown that it can bring players back to old titles by delivering re-imagined versions of those classics that run on the latest hardware. It’s also got an impressive track record of launching successful new properties.
The global video game industry looks poised to deliver strong growth through the next decade and beyond, and Activision Blizzard stands out as a clear category leader in the industry. For investors seeking dependable category leaders, this stock is a no-brainer.
Fresh brewed potential
Rich Duprey (Dutch Bros): Normally, I’m leery of investing in newly public companies. I prefer to wait to buy into businesses until they’ve had some time to work out all the kinks that come with being put under Wall Street’s microscope. Dutch Bros is an exception. Why? In a word: coffee. It’s a market that continues to expand, and Dutch Bros’ take on it, though not especially unique, has a lot of potential for growth.
Although Dutch Bros just had its IPO, the drive-thru coffee shop chain has been in business since 1992, so it’s not exactly wet behind the ears. In fact, it’s the third-largest coffee chain in the U.S., behind Starbucks and Dunkin Brands.
It has fewer than 500 owned and franchised locations in just 11 Western and Southwestern states, and has posted 14 consecutive years of same-store sales growth. It even achieved 2% growth in 2020, despite the pandemic. And it uses a model that can be rapidly expanded as market conditions allow.
Obviously, drive-thru coffee is nothing new. Folks have been getting their caffeine fixes at various fast-food chains’ pickup windows for decades. But where chains like Dunkin Donuts and McDonald’s live and die by the breakfast daypart, Dutch Bros has been able to keep its business high throughout the day by also offering energy drinks.
Its Blue Rebel brand serves as the basis for drink customization throughout the day, and is the main driver of sales in the afternoon. While 17% of Dutch Bros’ business occurs before 9 a.m. and 22% more happens between 9 a.m. and noon, fully 60% of Dutch Bros’ sales happen after noon. (For comparison, breakfast accounts for 25% of McDonald’s sales, but 40% of its profits.)
Energy drinks generate almost a quarter of Dutch Bros’ sales, and at least one Wall Street analyst thinks Starbucks steal a page from its playbook and start selling energy drinks too.
What makes Dutch Bros’ model so flexible is the size of its stores. Where a McDonald’s location requires a 50,000-square-foot lot and a store that’s upwards of 4,000 square feet, and Dunkin stores range between 1,200 and 2,500 square feet, Dutch Bros looks for lots around 25,000 square feet and its stores only need to be in the 865 to 950 square-foot range. As such, it’s cheaper and easier for Dutch Bros to site, build, and expand.
The stock soared on its debut, but has since settled down and currently trades at just 3 times sales. That’s a much more attractive valuation than the 5 times sales Starbucks is changing hands for, or McDonald’s price-to-sales ratio of 8.
A cheap, successful, and profitable chain that has plenty of room and ability to grow? To me, that’s a no-brainer buy.
Build it, and they will come
The formerly under-the-radar niche lender is morphing into a multifaceted personal finance services provider. It’s doing so through various means — ripping pages from social media companies’ playbooks to make its core mobile app stickier and easy to use, adding attractive products to its repertoire, and generally doing a good job of streamlining and bolstering its key business lines.
Somewhat similarly to Square, which is (justifiably) an investor darling in the fintech space these days, SoFi provides its clientele with a wide range of services. Users of its SoFi Invest app can trade securities, monitor their credit scores, and apply for loans, among other things. The company is building a digital personal finance ecosystem that’s comparable to Square’s business-focused ecosystem. And it’s certainly striking a chord with the younger set it targets as customers.
The service’s transacting user rolls have not only been growing, that growth has been accelerating. In the second quarter, user growth was 113% year over year to nearly 2.6 million people, up from growth of 110%, 90%, and 74% in the prior three quarters. Many young companies achieve high growth metrics for a time before their expansions peter out. SoFi’s thus-far consistent ability to accelerate its growth rate is rare and admirable.
Its Galileo offering also shows enormous potential. SoFi describes it as a system that “enables critical checking and savings account-like functionality… providing companies with an easy way to create sophisticated consumer and [business-to-business] financial services.” Its growth isn’t as hot as that of SoFi Invest’s membership rolls, but that’s speaking relatively. In each of the past four quarters, the company has more than doubled the number of Galileo accounts on a year-over-year basis. With the platform’s rapidly growing client base, SoFi could become a go-to fintech partner for many companies.
Finally, recent developments indicate that SoFi is close to obtaining its own banking license. This would greatly streamline its operations in that sphere, not least because it would allow the company to jettison the partners it now relies on — and compensates — for such services.
Revenue development for the company has been choppy, but it’s generally on the way up, with non-GAAP (adjusted) net revenue notching a new record in Q2. Although it’s not yet profitable, SoFi has posted four straight positive quarters on every tech-heavy company’s favorite financial metric — adjusted EBITDA.
The lack of profitability, the relative newness of SoFi as a stock, and the overshadowing popularity of Square in the fintech space are factors keeping many investors from opening positions in SoFi, in my view. Yet it’s installing many levers it can pull for revenue, so no one should shy away from buying its stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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