There’s no question that we’re in a bear market. Whether you use the arbitrary “down 20%” rule of thumb or simply look at the price action, it’s clearly bear-market territory. However, bear markets can often spell opportunity, even for small investors. And even for investors who have only $500 to spend, there are options. What are the best stocks for $500?
Before we talk about the stocks, investors must realize the long-term trend of the market.
Since 1950, the S&P 500 has delivered an annual gain roughly 80% of the years. While that span covers the last eight decades, the index also has given investors similar (or better) results over the last 20, 30, 40 and 50 years. So while we may be in the midst of a bear market now, we won’t be in one forever.
Long-term investors who buy the shares of companies with solid balance sheets and strong cash flows now will be rewarded. With that in mind, let’s look at a few of the best stocks for $500.
Best Stocks for $500: Microsoft (MSFT)
Microsoft (NASDAQ:MSFT) has traded terribly so far this year and just made new 52-week lows this week. However, with the stock down so much from its high, long-term investors have a great opportunity to buy the stock of what is truly a fantastic company.
First, Microsoft is widely diversified and has a presence around the world. It dominates the enterprise market with its various software programs, it has a gaming division (which it’s looking to bolster with a pending acquisition of Activision Blizzard (NASDAQ:ATVI)), a social media arm with LinkedIn and a robust cloud unit known as Azure.
These are among the businesses that are big drivers for Microsoft’s top and bottom lines. Speaking of which, analysts, on average, expect MSFT to deliver double-digit-percentage revenue growth from now through FY 2026. That’s alongside average expectations calling for 10% earnings growth this year and an 18% increase in 2023.
We also can’t forget that Microsoft has better operating margins than all of the FAANG names.
Lastly, the stock has been decimated. At the stock’s recent low, the shares were down about 33% from their all-time high in November. Microsoft’s shares have only fallen more than 30% one other time in the last 12 years, and that was when they dropped 30.5% during the Covid-19 selloff.
Best Stocks for $500: Alphabet (GOOGL, GOOG)
Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) also belongs on this list, but with a caveat. It’s a fabulous company with strong cash flows, a robust balance sheet and incredible assets.
Owning Google.com and YouTube.com is like owning Boardwalk and Park Place in Monopoly; they are the two most popular websites on the internet. Analysts, on average, expect double-digit-percentage growth from Alphabet for at least the next four fiscal years, while the company holds roughly $125 billion of cash and short-term securities.
For all of this, the owners of GOOG stock are paying less than 20 times this year’s earnings.
So what’s the caveat? The economy.
If we do see a global recession — particularly a harsh one — Alphabet’s business will be hampered. Its top line will be pressured, while its profits will suffer as its margins are squeezed.
But that’s only a short-term challenge that investors have to make it through. After all, the shares have already fallen 36% from this year’s high as the market is discounting the stock for these reasons. For comparison, Alphabet stock has only fallen more than 30% two other times in the last 12 years: A 31% fall in 2010 and a 34% decline during the Covid-19 selloff.
For the last stock on this list, you could choose any number of businesses. Some healthcare stocks have little to no exposure to the decline in non-U.S. currencies. Others stocks have fallen, even though their revenue and demand have not fallen.
But I’m going to go with PayPal (NASDAQ:PYPL) for my last pick.
Starting with the bad news, PayPal stock suffered a peak-to-trough decline of over 80% and remains 70% below its all-time high.
Further, analysts, on average, expect its earnings to fall 14.5% this year despite anticipating a near-10% gain in its revenue. The estimates indicate that it’s generating strong sales, while its margins are declining. Lastly, PYPL is a growth stock and so, unsurprisingly, it has sold off amid this bear market.
Now for the good news.
Analysts, on average, expect double-digit-digit revenue growth for PayPal in each of its next four fiscal years. As far as earnings, mean estimates call for 23% growth next year and an 18.75% jump in 2024.
Second, unlike many of its growth-stock peers, PayPal is profitable and generates positive cash flow. The firm reported trailing annual free cash flow of more than $5 billion and trades at 23 times analysts’ average earnings estimates and less than 20 times their mean 2023 expectations.
PayPal’s balance sheet could be a little better, but with more than $9 billion in the bank and $6 billion of net debt, the company should be just fine. And all of this comes after the company recently beat average earnings and revenue expectations and raised its full-year guidance.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.