When evaluating stocks to buy, investors tend to look for positive factors that can lead to a competitive edge. Such an edge happens when companies move ahead of their peers in a sector or when they develop a product enhancement or build a market in an existing industry.
Amazon.com (NASDAQ:AMZN) developed such an edge by becoming a first mover in e-commerce and later, cloud computing. Apple (NASDAQ:AAPL) gained its advantage by selling the first smartphone, ushering in a revolution that redefined the wireless industry. Such innovations change markets.
Either new companies will emerge to lead a new industry or old companies will make a comeback and redefine an existing industry. Such companies often become great stocks to buy.
The following four companies have developed such an edge:
Stocks to Buy: Walt Disney Co (DIS)
Given two recent disappointing Star Wars films, some might look at Walt Disney Co (NYSE:DIS) as a strange choice for a stocks to buy list. However, much has gone well for Disney, and I am not only talking about the theme parks. Where the Star Wars films have underwhelmed, its Marvel division has succeeded, particularly with the recent films like Black Panther and Deadpool 2.
My colleague Luke Lango points out Disney’s competitive edge well. When Disney goes into streaming, it will most likely become the Number One service in short order. It already owns what most regard as the best content library with Lucasfilm, Marvel, and the classic Disney films under its umbrella. That library will grow further if it wins the bid for the Twenty-First Century Fox (NASDAQ:FOXA)(NASDAQ:FOX) assets. The company will also remove content from the Netflix (NASDAQ:NFLX) platform once its own service launches. However, since DIS will charge a lower price for its streaming service, consumers can view Disney’s content library at a lower cost.
Analysts expect these moves will grow the profits of DIS stock by an average of 13% over the next five years. Moreover, DIS stock trades at a low valuation with a current price-to-earnings (PE) ratio of only 14. Netflix trades at a much higher 267 times earnings. Given the low cost of streaming services, a large percentage of consumers will subscribe to both. For this reason, I do not predict Netflix’s demise. However, when the choices consist of paying less for the best versus paying more for less desirable content, DIS stock will hold the competitive edge regardless of whether the Fox deal succeeds.
Stocks to Buy: Micron Technology, Inc. (MU)
Despite becoming a target of investigations and tariffs by the Chinese government, Micron Technology (NASDAQ:MU) deserves a place on the stocks to buy list. Throughout its history, MU stock has acted as a proxy for memory prices. Prices for memory have recently gone through the roof due to demand. However, everyone knows that someday prices will level out and crash. MU stock will likely crash with it. However, that day has not arrived yet, and the fear of the next crash keeps MU stock at a 5 PE ratio.
Meanwhile, demand for chips for artificial intelligence (AI), augmented reality (AR), virtual reality (VR), and other functions keeps prices high. Moreover, Micron continues to innovate. Earlier in the year, MU announced the release of 64-layer, second-generation 3D NAND storage products. This has helped MU as NAND memory demand has begun to soften. MU continues to innovate on DRAM memory as well.
The U.S.-China tariff wars have made Micron a target for tariffs. However, we still live in a world where demand exceeds supply. If the Chinese will not buy Micron chips, somebody else well. Hence, any selloff should be treated as a buying opportunity. Rarely do buying opportunities get better than a 5 PE ratio.
Stocks to Buy: Nvidia Corporation (NVDA)
Nvidia (NASDAQ:NVDA), like Micron, makes the chips critical in powering the next generation of technology. Once known as a producer of PC graphics chips, Nvidia leveraged its knowledge to drive the next generation of technology. Nvidia chips power data centers, virtual reality, and self-driving cars among other things. Nvidia remains the preferred company in this space, over Advanced Micro Devices (NASDAQ:AMD) and other companies.
Commanding this space has taken NVDA stock and its valuation to new highs. NVDA traded around $20 per share three years ago. Now, it tops $240 per share on profit growth that has averaged about 62.5% per year over the last five years.
Despite that growth, Nvidia remains on the list of stocks to buy. This is because the multiple has not reached the heights of some of the other giants in tech. Its forward PE stands at only about 33 times earnings. Investors should not expect another 12-fold increase in the stock price. In fact, analysts predict only single-digit earnings growth next year. However, they still expect to see annual growth of over 14% over the next five years. That growth should give NVDA stock the catalyst it needs to rise further.
Stocks to Buy: Spirit Airlines Incorporated (SAVE)
Spirit Airlines (NYSE:SAVE) makes the stocks to buy list by pioneering the so-called “ultra-low-fare” segment of the airline industry. It offers a no-frills service that makes the likes of Southwest Airlines (NYSE:LUV) or JetBlue Airways (NASDAQ:JBLU) look like luxury airliners in comparison.
Although Allegiant Travel Company (NASDAQ:ALGT) and Frontier Airlines also compete in this segment, no airline enjoys more success with ultra-low-fare than Spirit. Valuation also makes SAVE one of the better stocks to buy. It currently trades at about 11.9 times forward earnings. SAVE stock took a hit this year regarding both costs and earnings as market conditions and a labor dispute forced the airline to pay its pilots more. The stock fell from about $60 to around $30 per share a little over a year ago. It trades in the high $30s per share range today.
However, with the labor dispute behind them, analysts expect double-digit profit growth to resume in 2019 and 2020. Moreover, with its presence in most of America’s largest markets, the airline is evaluating smaller jets to offer service to sparsely-served smaller markets. As I stated in a previous article, this could lead to Spirit bringing the “Southwest effect” to smaller markets, lowering their fares and increasing the number of flights. Expansion into new Latin American markets also continues.
High-profit growth and a lower stock price present a buying opportunity. With continued profit growth and a move into smaller markets coming, I think those who buy SAVE stock now will see the value of their investment fly higher over the long term.
As of this writing, Will Healy is long MU stock. You can follow Will on Twitter at @HealyWriting.