Knowing which stocks to buy is a challenge for any investor, but it’s even harder for someone who is just starting out.

But today, I’m going to show you exactly where I’d put my first $1,000 if I were opening a new portfolio.

The first stock I bought was a little tech company in 2000 called Digital Island. I turned $500 into $4,800 in less than two weeks.

Luckily, I sold it right away, because 12 months later, the company was bankrupt.

This was at the height of the “dot-com bubble.”

Since then, I’ve been studying the markets and how people make real money…

It’s not rational to expect a 900% return in two weeks just buying a single stock. You need to have patience.

That’s especially true today, when the current bull market is about to become the longest on record and stock valuations are near all-time highs.

The Shiller P/E Ratio, a valuation tool applied to the S&P 500, shows that stocks may be overpriced. It’s currently 32.96, double the median of 16.16.

Also, the highest the ratio ever reached was 44.19 in December 1999, right before the dot-com bubble burst.

Fortunately, there are still undervalued companies to invest in….

Today, I’m going to reveal three stocks that I would buy if I only had $1,000 to invest (plus a bonus income opportunity).

I’m willing to bet you haven’t heard of any of these companies, but that’s the point.

The real money isn’t found in gambling in the stock market.

Go buy a lottery ticket if you want to follow the crowd, because this isn’t for you.

But if you’re a Money Morning reader who has the patience and wants a real chance at making market-beating returns, I know the companies Wall Street is overlooking.

Here’s how to take control of your financial future…

Stocks to Buy, No. 3: Home BancShares Inc.

Right now, there is a remarkable trend happening that few people know about.

But Money Morning Special Situation Strategist Tim Melvin has tapped into the ongoing consolidation trend of community banking stocks for the last five years.

Small community banks can’t compete against the large financial titans. Rising technology costs, regulatory oversight, and scale have made the banking industry too competitive.

Every year, we see a contraction of U.S. banks by 4% to 5%.

So instead of going extinct, small banks are looking for buyers.

And the wave is expected to continue thanks to recent tax breaks, rising profitability, and changes to the Dodd-Frank Act.

Home BancShares (Nasdaq: HOMB) is one of the banking companies benefiting from the consolidation wave.

HOMB invests and acquires community banks. Think of them as a hedge fund capitalizing on this trend that’s slipping under the radar of Wall Street.

In 2017 alone, Home BancShares bought Giant Holdings Inc. and purchased all of the outstanding shares of common stock of Stonegate Bank. It merged Stonegate with another acquisition, Centennial Bank, which added $2.89 billion in assets for the company.

Home BancShares rewards loyal shareholders with a dividend of $0.44 (1.87% yield), and Piper Jaffray expects the HOMB stock price to climb to $28 per share.

From [a recent] price of $23.33, that’s a potential profit of 20%.

And the profit opportunity from the next stock on my list could be even larger…

Stock to Buy, No. 2: KKR & Co. Inc.

Private equity returns are a dream for investors.

From December 2000 to December 2016, private equity has returned a whopping 255%, according to The Wall Street Journal. In comparison, the S&P 500 is up just 133% during that same time.

Unfortunately, private equity firms are normally reserved for the mega-rich.

However, there are still ways for retail investors to tap into this exclusive club.

KKR & Co. Inc. (NYSE: KKR) is famous for mainstreaming the leveraged buyout and creating a host of imitators.

Founded in 1976, founders and cousins Henry Kravis and George Roberts have created a legacy that is unrivaled in American business.

The company began with a $120,000 partnership.

Today, the company has $153 billion under management.

That’s even more impressive considering KKR’s founders have been in charge since the day it opened.

Since its inception, the firm has provided an annualized return of 19% to 20% a year.

KKR pays a dividend of $0.68 (2.51% yield), and analysts at Oppenheimer expect the stock price to climb to $35 per share. From today’s opening price of $27.89, that’s a potential profit of 25.49%.

That’s a good start, but analysts expect the stock price of this next company to climb 33%.

However, the profit opportunity could be much larger because this company is a potential acquisition target for the biggest e-commerce site in the world…

Stock to Buy, No. 1: Alarm.com Holdings Inc.

When I talk to new investors, I tell them they should buy cheap stocks or they should buy strong stocks.

By strong, I mean companies with strong earnings growth, strong cash flow, and a strong investment thesis.

Alarm.com Holdings Inc. (Nasdaq: ALRM) makes cloud-based software platform solutions for smart residential and commercial properties as well as Internet-connected devices like door locks, motion sensors, thermostats, garage doors, and video cameras.

Sales have been growing by almost 30% a year over the last five years, and profits are expected to grow by roughly 20% over the next five years.

Keep in mind that this company is ripe for an acquisition offer. Its primary rival, Ring, was just purchased by Amazon.com Inc. (Nasdaq: AMZN) for a cool $1 billion.

ALRM currently has a $2 billion market cap, and Amazon wouldn’t be afraid to pay more to own the company.

That could send the stock price higher.

For example, the Whole Foods stock price jumped 21.03% the day after Amazon announced it was buying the grocery chain on June 15.

The ALRM stock price opened at $44.12, and Maxim Group projects it will climb 33.72% to $59 per share in the next 12 months.

— Garrett Baldwin

Source: Money Morning