My first experience with stocks for beginners was in 1968. I was 13. My first investment was in a now-forgotten company called Datamation Services, a computer timesharing company. (Smart aleck’s would say they were the cloud.) I bought at $40. It went to $80. It was a custodial account I asked my dad to sell, but the broker convinced him otherwise. I was finally able to convince him when the stock fell to $20.
The point is you’re never too young to learn. It’s important to trust your instincts. It’s also important, sometimes, to take your lumps.
If you’ve just been given stock to start you on your way, it’s probably in one of the following companies. They’re all names you know. That’s supposed to get you interested in investing.
But if you really want to get into investing, watch what these stocks for beginners do over time. That’s because for now, time is on your side. Even if the market is overpriced today, even if these stocks take a fall, they should all come good over time. By the time you’re 30 you should be in good shape.
That makes more sense than taking a flyer on a hot issue that may fail. Like Datamation Services.
Adobe: The Great Software Bubble of 2020
First up on this list of stocks for beginners is Adobe (NASDAQ:ADBE). In July 2020, Adobe was part of the great software bubble.
It’s not that software isn’t valuable or that Adobe isn’t a good company. It’s just that when values get ahead of fundamentals, you should look out below. If you got Adobe as a gift recently, you have a front row seat.
In the middle of July Adobe was selling at about $420 per share. That’s a trailing price-earnings multiple of 55x, double what the average big stock is selling for. Even 27 is inflated by the trillions of dollars the Federal Reserve dumped on the market when COVID-19 sent everyone into lockdown.
This should not blind you to the fact that Adobe is a great company, with great people, great products, and a great strategy. By committing to the cloud early, specifically Microsoft (NASDAQ:MSFT) Azure, CEO Shantanu Narayen has delivered great results.
Since the start of the year Adobe is up 36%. Over the last year it’s up 46%. Over the last two years the gain has been 74%. The five-year gain has been 454%. Personally, I’ve been pounding the table for Adobe since 2017. I only began cooling on it, strictly based on its valuation, in March.
Adobe and other big software stocks are overvalued because software scales when distribution costs fall to zero, in a way nothing else does. You pay a monthly fee to use Adobe, but the incremental cost to Adobe of giving you this value is nearly nothing. But that doesn’t make software’s value infinite.
Over the long run, Adobe will be fine. It had $4.3 billion in cash at the end of March. Its growth rate is steady at 23% per year. The most recent earnings report, delivered June 11, was strong and in-line with analyst estimates.
Whether you’re looking at chart patterns or fundamentals, there is a lot to like about Adobe among stocks for beginners. But nothing climbs to the sky. This means that in a year or two, or maybe three, today’s investment in Adobe will pay off. Your dad or uncle will call themselves a genius. I have just one suggestion when they do that: Agree with them.
Amazon: The Pearl of Great Price
If you were very, very good, your mom or dad or Uncle Louie may have gotten you shares in Amazon (NASDAQ:AMZN). This is the most expensive on this list of stocks for beginners. If they did, you are very lucky. Just mind the fall.
That’s because, like Adobe, Amazon is overvalued right now. If your share was bought around Christmas when the price was $1,900, you’re a rich kid. If it was bought more recently, when the price briefly went over $3,000, you’re out of the money. For now.
As I have repeated many times here, Amazon is an infrastructure company. It’s not a merchant, it’s not a cloud, it’s not a TV network, although it competes with all kinds of retailers, cloud owners, and TV companies.
Amazon is infrastructure for making commerce happen in an Internet age. With the pandemic, that infrastructure is firing on all cylinders. Amazon had nearly $40 billion in operating cash flow during the first quarter alone. When it reports results on July 30, analysts hope for earnings of $1.84/share.
Of all the essential services in a COVID-19 wracked economy, Amazon is the most essential.
Amazon can break bulk and deliver products to your door for less than it costs stores. Amazon Web Services lets tens of millions work from home productively. This will make a lot of people, and office space, redundant as we come out of the pandemic. Amazon Prime Video, Kindle e-books, Twitch gaming, and Music services provide low-cost entertainment of all kinds around the world.
The world of 2021 will be vastly different from that of 2019. Amazon is our magic carpet to that future. It’s just that everything has a price, and Amazon is trading above that. No scaled company is worth 170 times its earnings, and no retailer is worth over four times its revenue.
Despite its size, its 30% annual growth, and its amazing market cap, Amazon can grow a long way without offering legitimate antitrust concerns. Its sales are still a fraction of those at Walmart (NYSE:WMT), the world’s biggest retailer. Its cloud revenue is less than that of Microsoft, and all its Alexa devices are still a pimple on the behind of Apple (NASDAQ:AAPL).
As the pandemic starts to let up Amazon’s hiring is slowing. Warehouse storage space is getting tight. Content costs are rising. Walmart is still competing. The crown does hang heavy on Bezos’ furrowing brow.
But that’s business. As with Adobe, just hang in on Amazon and let time work its magic. The company first hit $2,000 in 2018, and it took two years to get back there. In 10 years, today’s price will look cheap, even if Washington tries to break it up. That’s because Amazon is essential infrastructure. It is the most important company in America.
Google: The Cloud Czar as Institution
Amazon is still led by its founder, Jeff Bezos. Google’s founders, Larry Page and Sergey Brin, are now enjoying early retirements.
That’s one reason Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG), the parent of Google, is not as overpriced as Amazon. Institutions move more slowly than entrepreneurs can. In business you need a king or queen, not a parliament.
Sundar Pichai has been listed as CEO of Google since last year, but the company is really a Queendom. The queen is Ruth Porat, the chief financial officer. It’s her decisions, on where to invest and on dealing with the “other bets” Page and Brin created, like the self-driving car start-up Waymo and balloon-Internet company Loon, that will drive your shareholder value.
Since the start of 2020, shares of the search giant are up 17%. This put its market cap over the $1 trillion mark for the second time. The trailing price-earnings multiple is 31.7x. That’s not out of line for a market trading at 27 times earnings, although by historic standards it’s way too high.
When I was your age, money came out of the ground. Controlling oil, gas, or other key resources meant wealth. Today money rains down from the clouds. No company has done as much to create the cloud as Google. Clouds let thousands of computers work together or let one computer handle several tasks at once. Each cloud data center consists of millions of cheap PCs, all networked together, linked to the world by fiber cable. Google developed its cloud to handle its own search needs.
But not everyone welcomes our new cloud overlords. In the 2000s Google was known for the informal corporate slogan “Don’t Be Evil.” Today it’s viewed with increasing suspicion by policymakers. This makes growth increasingly difficult.
Google’s $2.1 billion acquisition of Fitbit (NYSE:FIT), a fitness band company that was going nowhere, has not yet been approved. States are focused on Google’s advertising business, the Justice Department on its dominance in search.
Chamath Palihapitiya, a former Facebook (NASDAQ:FB) executive-turned hedge fund manager, is warning investors away from Google, saying that it faces the same monopoly risks that drove Microsoft down for nearly two decades, before it satisfied the government and found the cloud itself. Regulation, taxation, and bringing in risk-averse executives could all drive its value down, he writes.
These critics forget that Google, like Facebook, is a global business. American and even European laws are local ordinances. Google Cloud competes with Amazon, Microsoft, and most ominous of all (if you’re trying to take it down), Chinese “Cloud Emperors” like Alibaba Group Holding (NASDAQ:BABA).
I think that last makes Google safe from the full government wrath that hurt Microsoft, and before it such companies as International Business Machines (NYSE:IBM) and AT&T (NYSE:T). America’s economic advantage is Google’s economic advantage. Only fools would throw it away.
There’s also an important lesson for your own career. In just 23 years, Google has gone from start-up to global dominance. If I were investing with a 10-year time horizon, I wouldn’t fear Google stock here. Everything is overpriced right now. But with the Chinese as the alternative, the Cloud Czars won’t be taken down.
McDonald’s: Food for the Lockdown and Beyond
If you got stock in McDonald’s (NYSE:MCD) for Christmas, say thank you and be ready to buy more.
While most food stocks were hammered by the coronavirus, McDonald’s is just 2% short of its price at the start of the year. It has done better than YUM! Brands (NYSE:YUM), which owns Taco Bell, or Restaurant Brands International (NYSE:QSR), which owns Burger King and Popeye’s. It is expected to report a profit of 75 cents per share when it next reports results July 28. That’s on revenue of $3.25 billion, down almost 40% from last year’s $5.3 billion.
If you are looking to buy stocks for beginners for the long-term, you can buy McDonald’s with confidence.
McDonald’s is a franchise, not a chain. The cost of running a store is on the franchisee. The franchiser is responsible for just setting policies, delivering raw materials like French fries, and marketing..
Most franchisees today are corporations who own dozens or hundreds of stores and may own multiple types of stores. So, no pity. McDonald’s has set aside only $40 million to help restaurants through the lockdowns.
Now the company is telling weaker store owners they may just have to sell. They’re also on the hook for remodels under the company’s “Velocity Growth” plan, which can cost $750,000 per store if the old one must be replaced. New stores have kiosks, curbside pick-ups, upgraded drive-thrus, and an Uber Eats counter for delivery orders. McDonald’s is pressuring franchisees to finish the work by promising to pay half the cost if they do it now, less if they do it next year.
Lessons have been learned in the first wave of lockdowns. One is that breakfast is hit worse than lunch or dinner. When the pandemic hit, about one-quarter of McDonald’s sales were of breakfast items. Limiting the menu to reduce food inventory risk, is another one of the demands of franchisees during the pandemic. For now, that’s being handled on a market-by-market basis, employees screened for illness as they start work.
If your grandfather bought you shares and you can hold them for 20 years, McDonald’s is a good bet.
If you bought your grandparents some shares, they might want to sell. Gramps will find a better price on this stock once the severity of the second wave is clear.
Southwest: How Grandma Says Hi
If your grandparents came over for Christmas last year, or you went there last summer, chances are you flew in a Southwest Airlines (NYSE:LUV) plane. If you’re interested in airline stocks for beginners, LUV is your best bet.
Southwest has gone from a standing start in 1967, flying just within Texas, into America’s dominant carrier, especially for short-haul and last-minute trips. That’s because it routes planes between points, rather than only through regional hubs. This means they spend more time in the air making money. I once watched a Southwest gate cycle three times before my own Delta Air Lines (NYSE:DAL) flight left California.
Like every other airline, however, Southwest was hit hard by the coronavirus. Shares were trading in mid-July at about $34, down almost 40% since the lockdowns hit. But the other big airlines, like Delta, United Airlines (NYSE:UAL), and American Airlines (NYSE:AAL) are all down by an average of 60%.
It’s not down more because it will go back to flying one day. Southwest has cash to last two years. On the other side of the pandemic, Southwest could return to its previous level near $60, and your overall return will be sweet.
The airline that comes out of the pandemic should be leaner, younger, and potentially more profitable. Goldman Sachs (NYSE:GS) upgraded Southwest to a “buy” in late June. Most analysts expect the stock to hit $44-$47 within a year. The Value Team calls Southwest the most undervalued airline, despite its relative strength. Patience, these analysts assert, will be rewarded.
Everything depends on the path of the pandemic, however, and there is evidence Southwest is losing patience. The company is trying to goose demand for the fall with a sale, offering fares as low as $39 one-way.
You go. Grandpa here is staying home.
Walt Disney and the Power of Magical Thinking
No company better represents magical thinking as Walt Disney (NYSE:DIS). It’s a name perfect for this list of stocks for beginners.
Disney today is an entertainment conglomerate that, like a good meat packing plant, can extract all the value from a concept, including the squeal. It was going through a difficult transition, people moving from cable to streaming, when the pandemic hit. Theme parks and cruise lines were the ultimate Disney monetization of its most value properties, of Star Wars, Marvel, of ESPN and animated movies.
Shares fell to a low of $85 in March, but opened July 13 at over $120. The stock recovered two-thirds of its pandemic loss even while analysts anticipated a loss on 20% less revenue, $15.9 billion. Even that may be optimistic.
In the near-term, Disney stock should be in a world of hurt. The magical thinking in this case represents a theme of this gallery, which is time. Give good companies time and they will usually become good. Disney is a good company.
You can see what’s possible in Disney’s first fiscal quarter report, covering the last pre-pandemic quarter ending in December. What it called “direct to consumer” revenue quadrupled, thanks to the streaming bundle of ESPN+, Disney+ and Hulu. Yet revenue from media networks, mostly cable, rose 24% and studio revenue doubled.
For the June quarter, media network revenue must be down. Studio revenue should be near zero. So should revenue from the theme parks. Even if direct to consumer revenue doubles, it can’t make up for that. Disney was getting $9/month for its sports networks for each cable subscriber, while charging $5/month for ESPN+.
Then there is the re-opening of the parks.
What Disney calls its “bubble” is already open for NBA and MLS stars. They will be quarantined at the company’s Florida resort while they finish their seasons without fans. While some have joined in the happy talk, two of the soccer teams have already been sent home. At least one more match was postponed by a positive test for COVID-19. The NBA says 25 of its players have tested positive, and doctors are worried about long-term side effects.
Then there’s the Disney debt. Disney had $41 billion more debt than cash at the end of May. That’s because it bought out Fox Entertainment right before the pandemic. It was terrible timing.
The Federal Reserve has been buying some of that debt as a way to get the economy through the crisis. Disney revenues aren’t expected to return to pre-pandemic levels for a year and that debt will remain on the books.
Over the next year there is no reason to be optimistic, and no reason for you to buy more Disney in your portfolio of stocks for beginners. But at a market cap of $215 billion, Disney is already trading at three times its pre-pandemic revenue. At some point investors are going to look down into the reality of this situation and sell. That’s when you might consider buying more.
Hertz: Life After Death
Last on this list of stocks for beginners is Hertz Global Holdings (NYSE:HTZ). If you got some Hertz stock for Christmas, please sell it. This is not one of the stocks for beginners, but for losers.
Hertz declared itself bankrupt after trading ended on May 22. But in July it was still trading. Why?
But Hertz had just $1.4 billion in cash on its books at the end of March, and $1.84 billion in debt beyond the leases on its fleet. Its cash balance had fallen to as low as $365 million by the end of June. That’s why Hertz went bankrupt. They can’t pay their bills.
Beyond the pandemic, Hertz’ bankruptcy holds an important lesson for young investors. Business models change. Companies that don’t change with them go broke. In Hertz’ case it was the rise of virtual cab companies like Uber (NASDAQ:UBER) and Lyft (NASDAQ:LYFT). These services were already crushing Hertz when the pandemic hit. They don’t own cars and the drivers are independent contractors.
If you’re in college, you may feel you’re getting blamed for Hertz’ zombie trades. That’s thanks to Robinhood, a commission-free trading platform that lets people buy partial shares of big companies and trade overnight. There are now 13 million traders, most of them young, using the Robinhood app trading tips, and some of them are dumb. Like the idea of buying Hertz.
The number of Robinhood accounts with shares of Hertz rose from 43,000 before the bankruptcy to as many as 171,000 in the middle of June. The shares’ post-bankruptcy peak was $5.30 on June 8.
It doesn’t take much trading to move a low-value stock. At $5.30, the value of the company was no more than $1 billion. It would have been no higher than $1 billion at its post-bankruptcy peak. 128,000 new traders could easily prop up that stock. For a while. On July 7, Hertz’ market cap was just $208 million. They’re burned now. It’s Datamation all over again.
When it comes to stocks for beginners, every young investor makes mistakes. I lost money on Apple back in the 1990s, selling out just before Steve Jobs began working his magic. In time, you learn, you improve, and so do your results in your portfolio of stocks for beginners.
I’m here for that.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT, AMZN, AAPL, FB and BABA.