For equity investors, 2020 has been one of the most volatile ones in recent history. However, as we enter the fourth quarter of 2020, the markets have stabilized and are even trading up on the year.
The S&P 500 fell by 36% in early 2020 and then staged an unprecedented recovery to trade 7.3% higher, year-to-date. Does this mean we are on the brink of yet another bull market?
It could be, let’s take a look at five companies in the S&P 500 that should be part of your portfolio.
The largest company in the world
The first stock on the list is Apple (AAPL), a company with a market cap of $2.1 trillion. AAPL has been a solid wealth creator for investors since the start of this millennium, easily outpacing the S&P 500.
While the tech giant was overly dependent on the iPhone for driving sales in the first half of the last decade, its Services segment as well as wearable devices such as AirPods and the Apple Watch have helped diversify its revenue base considerably.
In the June quarter, the iPhone accounted for less than 45% of total sales, compared to over 60% in fiscal 2015. Apple’s Services segment includes several subscription products such as the Apple Care, Apple Arcade, Apple TV+, and the highly lucrative App Store.
Apple is one of the largest smartphone manufacturers in the world and leads the wearable space as well. It has a huge market presence in most verticals and has successfully created an ecosystem that ensures repeat purchases.
The tech heavyweight continues to launch products every year and is one of the most recognizable brands in the world. Investment mogul Warren Buffett remains bullish on Apple and the stock accounts for close to 50% of Berkshire Hathaway’s portfolio.
An e-commerce giant
Another high growth tech stock is Amazon (AMZN), which is also part of the Berkshire Hathaway portfolio. Amazon is the largest e-commerce retailer in the world and while the traditional retail segment has been massively disrupted due to COVID-19, the online platforms have seen an equally surprising surge in demand.
The ongoing pandemic has acted as a tailwind for Amazon and several other e-commerce peers including Shopify (SHOP) and Etsy (ETSY). The shift to online shopping is a fundamental change in consumer shopping behavior which is here to stay. Total online sales accounted for 16% of total retail sales in the second quarter of 2020, up from just 11% in the fourth quarter of 2019.
Investors can expect this figure to move higher over the upcoming decade. Further, there is tremendous growth for Amazon in emerging economies such as India where online shopping is still at a nascent stage.
Amazon’s other business segment such as Amazon Web Services and Amazon Advertising will also support top-line growth. AWS is the largest public cloud platform in the world while its ad platform is the third-largest digital platform after Facebook and Google.
The latest Dow Jones addition
The third company on the list is SaaS company Salesforce.com (CRM), which has just replaced Exxon Mobil (XOM) on the Dow Jones Index. In the last two quarters, Salesforce’s total sales were up 30% year-over-year. Each of its verticals experienced revenue growth north of 20% while its Platform business increased sales by 64% year-over-year.
Salesforce has been the leading customer relationship platform (CRM) in the world since 2013 and ended 2019 with a market share of 18.4%, according to research firm IDC.
Salesforce continues to benefit as businesses are rapidly shifting operations towards the cloud. However, the stock has returned 6,500% since its IPO in 2004 which has resulted in a sky-high valuation. Salesforce stock is trading at a forward price to earnings multiple of 100x while its price to sales multiple is 11x.
A fintech giant
Another stock from the Berkshire Hathaway stable is fintech behemoth Visa (V), a company that owns about 53% of the credit card network purchase volume in the U.S. which is also the world’s largest economy.
Visa is not a lender and just a payment facilitator making it relatively immune to economic cycles. However, in a recessionary environment consumer spending tapers off which will impact Visa’s top-line growth.
Visa has tremendous potential given the digital payment revolution is just starting in developing economies of Asia and Latin America. Visa is one of the fastest-growing stocks in Berkshire’s portfolio as analysts expect the company’s annual earnings to grow by 8.5% through 2023.
Visa recently pumped in $5 billion to acquire Plaid, another player in the fintech space, which shows it is not averse to big-ticket acquisitions.
A streaming bet
If you think streaming is the way we are going to consume entertainment in the future, you can look to invest in Roku (ROKU). Shares of Roku have gained a staggering 800% since its IPO in September 2017.
Roku is the largest selling smart-TV operating system in North America and is platform agnostic which allows you to access several streaming applications including Disney+, Netflix, and Amazon Prime as well as a number of ad-supported content platforms.
In the second quarter, Roku sales were up 42% year-over-year, while the number of active accounts grew 41% and the number of streaming hours jumped 65%. However, Roku remains unprofitable and reported a net loss of $43 million in the June quarter, up from a loss of $9.3 million in the prior-year period.
Roku continues to trade at a premium and has a price to sales multiple of 20. However, we can see that the company’s valuation is supported by robust growth.
The final takeaway
All five companies on this list are “growth machines” and are expensive compared to value stocks. This means they could be vulnerable in a broader market sell-off. However, these tech companies are part of large addressable markets which indicates they have enough fuel left in the tank to keep driving revenue higher and generate market-thumping returns.
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AAPL shares were trading at $120.32 per share on Thursday afternoon, down $0.87 (-0.72%). Year-to-date, AAPL has gained 64.80%, versus a 8.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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