There are plenty of different investing strategies that, if you’re patient, can pay off for years to come. Some of them are relatively safe, like investing in well-established dividend stocks, while others can be more volatile but have the potential for much more significant gains.
If you’re interested in the latter, then read on to find out why…
Benefiting from the war on cash
Nicholas Rossolillo (Mastercard): Even with trade wars and fears of global economic slowdown dominating headlines, the transformation to a world without cash is alive and well. It’s a boon for payment processing companies, and Mastercard is one of the best around.
Granted, the company is already massive, valued at a market cap of over $270 billion and hauling in $15.7 billion in revenue over the trailing 12 months. That doesn’t mean this isn’t a high-growth concern, though. Through the first six months of 2019, revenue was up 10% and earnings per share rose 31%. That’s due to Mastercard’s high profit margins (operating profit margin was nearly 58%), tight control on expenses, and a generous share-repurchase program that gives the bottom line an extra boost.
Besides its core payment system, Mastercard continues to strengthen its position by adding ancillary services, such as cross-border payment systems and data security, for its customers. Some of those systems are home-grown, while others have been added via acquisition, like its purchase of Transfast earlier in 2019. Revenue outside of its bread-and-butter payment processing segment notched a 23% year-over-year increase in the second quarter.
Mastercard is currently valued at 30 times one-year expected earnings, a hefty price tag given that the S&P 500carries a one-year forward price-to-earnings ratio of 17.7. However, given the steady pace of expansion at Mastercard and the even faster rate of revenue conversion to profitability, it isn’t an outlandish premium to pay. With Wall Street engrossed with news of impending economic doom, Mastercard stock looks like a rock-solid buy.
A growth story gaining traction
Daniel Miller (Carvana): Carvana, a rapidly expanding used-car retailer, is a top growth stock currently firing on all cylinders, and Wall Street has taken notice. The stock has more than doubled in 2019, is up roughly 480% since my article mentioning it as a stock you can’t afford to miss, and is up nearly 600% since it went public two years ago. Let’s cover some of its impressive growth metrics, and also the risks that come with owning the stock.
Glancing over Carvana’s Aug. 7 second-quarter result, you can see why investors are jumping on board. Carvana recorded its 22nd straight quarter of triple-digit revenue growth, driven by a 95% increase in retail units sold. Carvana entered 28 new markets, completed two vending machines, and even recorded a sharp $1,002 increase in gross profit per unit (GPU) to $3,175 — an impressive jump that surpassed its $3,000 midterm goal.
Carvana’s growth story is still in the early stages. The used-car retailer is poised to continue to grow retail units and revenue, increase its annual GPU, and lower its advertising as a percentage of revenue over time. There are other factors that should boost the company’s financial results, including Carvana’s newer trend of buying more vehicles from consumers than it had previously — vehicles purchased from consumers and then sold at retail are more profitable than vehicles purchased from auction and sold at retail. Another trend working in the company’s favor is simply time in markets: Carvana’s older markets continue to lower customer acquisition costs while increasing market penetration. Carvana has a long list of new markets that have only just scratched the surface of their potential.
One drawback to Carvana’s growth story is that it’s expensive to expand so rapidly. Management has completed secondary offerings and taken on debt to help fund its growth, and it remains a ways away from profitability. The risk is that Carvana won’t reach profitability fast enough for investors, and the stock price will suffer as a result. For now, investors are thrilled with its top-line growth and market expansion, and that’s enough to make it a top stock to buy right now — if you can stomach the risk of a high-growth stock in the automotive industry…
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