When starting a new activity, it’s a good idea to concentrate on basic principles first and to try to give yourself a good chance of at least modest success. Modest success leads to confidence which, in turn, encourages beginners to devote more time to their new activity, yielding additional positive milestones. Similar principles apply when it comes to picking stocks to buy for beginners.
For investors, the rough equivalent of “just make contact” for a young baseball player is “just aim for fairly modest gains.” And just as those trying to hit baseballs for the first time don’t try to hit curveballs or very fast pitches, beginning investors should not try to buy the shares of companies that have complicated products, very high debt levels, problematic legal issues, or huge threats from competitors.
Instead, the best stocks to buy for beginners are those of successful, well-established companies with relatively simple products and without complicated, huge threats.
Such stocks give investors the best chance for at least modest gains.
Here are three to buy now:
Stocks to Buy For Beginners: McDonald’s (MCD)
No other product category is as easy to understand as food and beverages. Everyone, of course, eats and drinks, and the vast majority of people also eat restaurant food (we used to say, “eat out,” but that’s not the correct terminology any more).
So, it’s fairly easy for almost everyone to understand the products of restaurants like McDonald’s.
McDonald’s is very popular and isn’t facing difficult threats; even in the second quarter, during the worst part (thus far) of the novel coronavirus pandemic, the company generated earnings per share of 66 cents and sales of $3.76 billion. And in June, McDonald’s U.S. comparable sales fell just 2.3% year-over-year, In July, sales in both the U.S. and overseas improved,
The owners of MCD stock don’t have to worry about debt, as the company has $3.25 billion of cash and short-term investments, $7.2 billion of short-term debts. and nearly $50 billion of assets.
Drive-thru transactions accounted for almost 90% of its sales in Q2, indicating that McDonald’s can adapt fairly well to the pandemic. But the biggest opportunity for the owners of MCD stock will come after a vaccine is introduced to the majority of the population. At that point, pent-up desire to eat in restaurants, combined with the relatively weak economy which will prevent many people from eating in more expensive restaurants, should create an excellent environment for the company.
Although McDonald’s is involved in a messy legal battle with its former CEO, the litigation is not a major threat to the company’s business.
Yum! Brands (YUM)
In many ways, YUM stock is quite similar to MCD stock. Like McDonald’s, Yum’s restaurants (with the exception of Pizza Hut) are very popular, and Yum is not facing any tough threats from competitors or worrisome legal issues.
Further, Yum reported Q2 EPS of 82 cents versus analysts’ average outlook of 67 cents. The company’s revenue came in slightly above the mean outlook and fell only 8.4% YOY. Moreover, as I pointed out in a previous column, in June the same-store sales of Yum’s open restaurants fell only a few percentage points.
So, it does appear that, as I wrote in the prior piece, “cheap tacos, affordable chicken meals and pizza are foods that people who are struggling economically tend to get delivered.” Yum is clearly capitalizing on the adaptability of its products to the current environment. To the extent that delivery remains popular in the months and years ahead, Yum should do fairly well.
Yum has $1.44 billion of cash and short-term investments, and $2.4 billion of assets, versus $1.475 billion of total current liabilities.
And importantly, like McDonald’s, Yum should get a huge boost from the combination of pent-up demand for restaurants and the still-recovering economy after a vaccine is launched.
NextEra Energy (NEE)
NextEra has the stability of a utility because a majority of its revenue comes from operating two electricity producers – FPL and Gulf Power – which both service homes and businesses in Florida. But the company’s Energy Resources unit provides investors with growth because it owns solar farms and wind farms which are benefiting from strong demand and are becoming quite valuable.
Additionally, in many cases, solar now costs less than fossil fuels, so the solar farms can boost NextEra’s bottom line, lifting NEE stock in the process.
Additionally, NextEra announced on its Q2 earnings call in July that it would start investing in hydrogen which should also see strong demand as companies look to make their trucks more “green.” In the longer term, Next Energy’s investments in renewable energy should greatly boost NEE stock.
In my opinion, electric utilities, as well as the ownership of solar farms and wind farms, are pretty easy businesses to understand. And they were good businesses for NextEra, even in the midst of the coronavirus pandemic; in Q2, FPL’s EPS rose 15 cents YOY, while the EPS, excluding some items, of Energy Resources, which owns the company’s renewable energy assets, rose 13 cents YOY. Gulf Power’s EPS inched down just 1 cent YOY.
When a vaccine is ultimately launched, FPL and Gulf Power will benefit meaningfully from the reopening of many stores and offices. Over the longer term, the company’s results and NEE stock should get a big boost from increased demand for electric vehicles. Moreover, NextEra should benefit from the relocation of hundreds of thousands of Americans to Florida amid the violence in many cities and likely large tax hikes in other states.
Impressively, on April 3, during the worst days of the pandemic, Fitch gave NextEra a very good A- rating, saying that the company would experience a limited impact from Covid-19. The rating indicates that the company has a low risk of defaulting.
The agency added that “growth in the higher margin residential segment due to work-from-home policies can offset in part the impact from lower commercial sales,” and it remained upbeat on the company’s renewable energy business.
Fitch’s high rating shows that the company isn’t facing any tough threats.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.