As 2022 reminded investors, the stock market doesn’t move up in a straight line. Last year, all three major U.S. indexes fell into a bear market and delivered their worst yearly returns since 2008.
While it’s not uncommon for bear markets to worry investors and test their resolve, it’s important to understand that every significant drop in the stock market throughout history has served as a surefire buying opportunity for long-term investors. Though we’ll never know in advance when bear markets will begin, how long they’ll last, or how steep they’ll decline, we do know that every big drop is eventually wiped away by a bull market rally.
Something else you should know is that you don’t need a massive bankroll to begin putting your money to work on Wall Street. Since most online brokerages have done away with commission fees and minimum deposit requirements, any amount of money — even $500 — can be the perfect amount to put to work right now.
If you have $500 ready to invest — and there’s no chance you’ll need this cash to cover emergencies or pay bills — the following three stock stand out as no-brainer buys.
Bank of America
The first stock that’s a no-brainer buy with $500 is banking giant Bank of America (BAC).
As you’re probably well aware, regional bank SVB Financial (SIVB), the parent of Silicon Valley Bank, was seized by regulators last week. SVB had purchased a sizable amount of longer-dated Treasury bonds, which declined in value when the Federal Reserve aggressively raised interest rates. This drop in Treasury bond value, coupled with a bank run (i.e., depositors wanting their money back), sent SVB Financial into receivership and cast the discerning eye of Wall Street on all other bank stocks.
Despite this as a red mark for financial stocks, SVB Financial had a rather unique operating model dependent on venture-capital deposits. A well-diversified money-center like Bank of America doesn’t have anywhere near these concerns.
The single biggest catalyst for BofA is the Fed’s hawkish monetary policy. When the nation’s central bank increases interest rates, banks benefit in the form of higher interest income on variable-rate outstanding loans. Among large banks, none is more interest-sensitive than Bank of America. In just the fourth quarter alone, BofA recognized $14.7 billion in net-interest income, which is a $3.3 billion jump from the prior-year quarter. Note, the Fed is still increasing interest rates.
As I’ve previously pointed out, Bank of America has also done an exceptional job of promoting digital adoption. You might not think of this stodgy bank as an innovator, but it’s successfully grown the number of active digital users from 38 million to 44 million between 2019 and 2022. Likewise, the percentage of total sales completed online or via mobile app has climbed from 32% to 49% (also between 2019 and 2022).
The importance of digital adoption can’t be overstated for banks. Digital transactions cost just a fraction of what in-person interactions run. As more of its customers shift online, BofA will be able to consolidate some of its branches and continue to improve its operating efficiency.
Bank of America looks like an absolute steal at just over 8 times Wall Street’s consensus forecast earnings for 2024.
Petco Health and Wellness
Pet-focused stock Petco Health and Wellness (WOOF) is a second company that would make for a no-brainer buy right now with $500.
With a number of recession-probability indicators screaming at the top of their proverbial lungs that an economic downturn is imminent, it’s not a surprise to see Wall Street a bit skeptical of a retail chain like Petco. After all, it’s not been immune to the supply chain challenges and inflationary pressures impacting retail stocks.
But there’s a big difference between a traditional retail chain for humans and a pet-focused retail chain. There hasn’t been a year-over-year decline in U.S. pet expenditures in over a quarter of a century, based on data from the American Pet Products Association (APPA). Since people tend to view their pets as an extension of their family, spending on their well-being and happiness continues to grow in all economic environments.
To add to the above, pet ownership is higher now than at any point in at least the past 35 years. When the APPA conducted its first annual survey in 1988, 56% of U.S. households owned a pet. As of the 2021-2022 survey, 70% of U.S. households owned a pet. The foundation is set for pet expenditures to continue growing.
What specifically makes Petco Health and Wellness such an intriguing investment is the focus being placed on subscription services. For instance, the company’s Vital Care membership provides shoppers with discounts, membership points, grooming discounts, as well as upgrade options that can reduce boarding costs or the pricing of routine veterinary exams.
Additionally, Petco is offering pet insurance and veterinary services co-located at its stores. Subscription services tend to generate recurring, high-margin revenue, and they represent an excellent way to keep consumers loyal to the Petco brand.
As one final note, Petco has been dealing with a number of costs tied to its acquisition of Thrive. The one-time integration costs associated with this deal should be out of the picture sooner than later.
Given the steady growth prospects for the pet industry and Petco’s ongoing subscription-services transformation, it looks like a deal at less than 14 times Wall Street’s forward-year consensus earnings.
The third no-brainer stock to buy with $500 right now is payment-processing behemoth Mastercard (MA).
Let me state upfront that what happened with SVB Financial doesn’t impact Mastercard. The biggest headwind for Mastercard is simply the expectation that a recession will materialize in the U.S. sometime this year. Because it’s a cyclical company, a U.S. or global recession would almost certainly result in reduced consumer and enterprise spending. Less spending means lower fees collected by Mastercard.
But patience has done wonders for Mastercard’s shareholders. Even though it’s a cyclical business, the peaks and troughs are disproportionate. Whereas every recession since World War II has lasted just two to 18 months, periods of expansion are capable of extending longer than a decade. As U.S. and global gross domestic product grow over time, so does Mastercard’s ability to collect fees from its ever-expanding merchant network.
Although Mastercard isn’t the top dog in the U.S. — that title belongs to rival Visa — it has a lock on the No. 2 share position. Accounting for close to 24% of credit card network purchase volume (as of 2021) in the top market for consumption worldwide isn’t a bad place to be.
But it’s Mastercard’s growth runway that’s truly impressive. Most of the world is still using cash to facilitate transactions. Whether Mastercard is acquiring other businesses or organically building up its infrastructure in emerging markets, it has a sustainable double-digit growth opportunity that extends decades down the road.
Mastercard also holds a competitive edge over most financial stocks. It’s secret sauce is that it strictly sticks to processing payments and hasn’t been lured into lending. While lending can be lucrative during periods of expansion and generate interest income and annual fees, it also exposes lenders to potential loan losses and delinquencies during recessions. By simply saying no to lending, Mastercard avoids having to set aside billions in cash for loss provisions. This is what allows it to bounce back so quickly from economic downturns, and explains why its gross margin is reliably above 40%.
Mastercard’s forward-year price-to-earnings ratio of 23.9 is the lowest it’s been since 2016. That makes its stock ripe for the picking.
— Sean Williams
Motley Fool Stock Advisor's average stock pick is up over 350%*, beating the market by an incredible 4-1 margin. Here’s what you get if you join up with us today: Two new stock recommendations each month. A short list of Best Buys Now. Stocks we feel present the most timely buying opportunity, so you know what to focus on today. There's so much more, including a membership-fee-back guarantee. New members can join today for only $99/year.
Source: The Motley Fool