Stock Market Sell-Off: Where to Invest $500 Right Now

por newsfeedback@fool.com (Jon Quast)

The Motley Fool / 2023-04-01 14:179


I don't know how much $500 is to you personally, but I do know it's a lot of money to many people.

According to research by The Motley Fool, the median annual family income in the U.S. was almost $70,000 in 2021, which works out to about $5,800 per month. Let's say the median family saved 10% of monthly income for investing in stocks -- a percentage worthy of applause. For such a money-smart family, $500 would almost be an entire monthly investment.

With this in mind, I'm treating a $500 investment as one whole position in a diversified portfolio -- if you invest the Motley Fool way, you'll be looking to build a portfolio of at least 25 companies. And buying stocks during a pullback like right now (the S&P 500 is down 17% from its all-time high) is a great time to do it.

However, rather than shortchange you with just one idea for your portfolio today, I'll be giving you three different ideas: equipment-rental company United Rentals (URI 2.48%), furniture company Lovesac (LOVE 4.75%), and online education platform Udemy (UDMY 3.28%). And each idea could serve a different purpose in a portfolio.

1. United Rentals: The safe dividend-growth opportunity
If I were starting out today, I would want to begin by laying a strong foundation for my portfolio. And United Rentals is the kind of company that can be foundational, in my opinion.

It has a long history of market-beating returns. And it just started paying a dividend, leaving plenty of room to grow it in the future.

According to management, United Rentals finished 2022 with 17% market share in the equipment-rental space in North America with nearly 1,500 locations. It has over 1 million equipment units (backhoes, water pumps, scissor lifts, and more), which are valued at nearly $20 billion. That scale is hard to replicate and gives it a competitive advantage.

As long as people need equipment to do jobs, United Rentals has a reliable business. Moreover, it has a very profitable business: It has generated positive free cash flow in 17 of the past 20 years. And management expects more than $2 billion in free cash flow in 2023, which should be around a 15% margin.

Management has options for its cash flow, including acquiring other companies and repurchasing shares; it frequently does both. But it also just started using some of its cash to pay a quarterly dividend of $1.48 per share. For perspective, that's only about 20% of its earnings, leaving plenty of room to increase the dividend in the future.

And if United Rentals isn't up your alley, don't worry: There are other safe, dividend-growth opportunities out there for laying a strong foundation in your portfolio.

2. Lovesac: The profitable growth company
United Rentals' revenue is up around 66% over the past five years. But that doesn't hold a candle to Lovesac's revenue growth of more than 400% during this time. The company's high-quality beanbag chairs and sectional couches are increasingly in demand.

And high margins allow it to turn a profit while it grows. This is a great kind of company to add to a portfolio as you build beyond your foundational stocks.

On the surface, one would think that Lovesac is just another furniture company. But it has some important distinctions. Nearly 90% of sales come from its sectional couches, called Sactionals. And this has many advantages for the business.

For starters, Lovesac is constantly updating its Sactionals. In 2021, it released its StealthTech technology, which provides immersive sound and wireless charging for phones. In a brilliant move, management makes all new Sactional add-on products backward compatible so existing customers can spend more over time. In this way, Lovesac can extract more lifetime value from its customers than many of its peers can.

Moreover, it has advantages because all Sactional sections are uniform in size. Showrooms need little space to demonstrate how to configure them in multiple ways. Inventory stacks nicely in the back. And e-commerce orders -- about one-quarter of sales -- ship easier than typical bulky furniture. This helps Lovesac showrooms have a payback period of under one year, which is very important for retail companies with physical stores.

Lovesac's unit economics support its profitability. It earned $28 million in net income in its recently completed fiscal 2023 and expects $30 million to $36 million in its fiscal 2024.

And the company still has great revenue growth prospects. It has 195 showrooms right now but plans to more than double its store count over the next five years. Assuming the popularity of its products continues, this profitable growth stock could outperform the average for the S&P 500.

3. Udemy: The speculative stock with a high upside
According to third-party research group Arizton, the market size for e-learning is around $214 billion worldwide. But this is expected to surpass $475 billion by 2027. And it's clear that much of this spending will come from businesses looking to increase their workers' skills. HR media platform People Matters estimates that corporate e-learning could be a $370 billion market. 

So Udemy has an enormous runway for growth, considering that annual recurring revenue (ARR) for its enterprise segment was only $372 million at the end of 2022.

Udemy's education content is generated by users, not the company. It is merely the distribution platform connecting educators with anyone who wants to learn. User-generated content businesses typically have good margins. And indeed, Udemy's gross margin is 56%.

Udemy is not profitable; it had a net loss of $154 million in 2022. But there's a simple reason to hope the company quickly turns this around. Its enterprise segment has a more robust gross margin of almost 67%. And this part of the business is growing faster than the business as a whole.

As a whole, revenue was only up 22% year over year in 2022. But ARR for its enterprise segment was up 57%. Projecting this rapid growth forward, Udemy's gross margin should creep higher, potentially improving its bottom line substantially, which could make this a winning investment.

On the flip side, Udemy might never turn the corner on profits. And if it doesn't, chances are slim that it will enrich shareholders. That's why Udemy (and other promising tech stocks that are still unprofitable) might be best to buy only after you've built your portfolio around 25 or more companies that have higher chances of positive returns, like United Rentals and Lovesac.

However, considering it trades at less than two times trailing sales, I'd say now is an opportune time to take a chance on Udemy. There are risks with this stock, but at least the valuation risk is minimal here.

Personally, my retirement portfolio is already quite large with over 30 stocks. And that's why of these three companies, Udemy is the one I'd consider buying today. But I believe all three could be good investments from here.

Jon Quast has positions in United Rentals. The Motley Fool recommends Lovesac. The Motley Fool has a disclosure policy.

Enviado de Outlook para Android

Deep Dive: This stock ETF keeps beating the S&P 500 by selecting for quality

MarketWatch.com - Top Stories / 2023-04-01 15:37



There are many approaches to building stock portfolios for the long term, but all of them require patience. And chasing last year's best performers can hurt your long-term results, as Mark Hulbert explained.

And even if you are patient, a long-term active strategy may underperform broad indexes and the exchange-funds that track them. One reason for underperformance might be that the actively managed funds have higher expenses. Another reason is that the S&P 500 SPX, +1.44% has been so top-heavy, with the largest technology players dominating its performance during the bull market through 2021.

Even now, following an 18% decline in 2021, and a 4% return in 2023, the top five companies held by the SPDR S&P 500 ETF Trust SPY, +1.41%, which tracks the benchmark index, make up 21.3% of the portfolio. These are Apple Inc. AAPL, +1.56%, Microsoft Corp. MSFT, +1.50%, Amazon.com Inc. AMZN, +1.26%, Nvidia Corp. NVDA, +1.44% and Alphabet Inc. GOOG, +2.65% GOOGL, +2.81%. (All returns in this article include reinvested dividends.)

The last four companies listed above are also held by the $7.2 billion Van Eck Morningstar Wide Moat ETF MOAT, +1.60%, but this fund uses a modified equal-weighted strategy as it is reconstituted and rebalanced every quarter. The fund was established in 2012. It tracks Morningstar's Wide Moat Focus Index.

Here are MOAT's returns through March 28, compared with those of SPY, over various periods:

ETF Ticker 2023 1 year Three-year average Five-year average 10-year average
VanEck Morningstar Wide Moat ETF MOAT, +1.60% 9.1% -4.4% 19.8% 13.1% 13.2%
SPDR S&P 500 ETF Trust SPY, +1.41% 3.8% -11.7% 17.8% 10.7% 11.8%
Source: FactSet
Here's a 10-year chart of the ETFs' total returns:


FactSet
During an interview, Brandon Rakszawski, director of product management at VanEck, said the Morningstar Wide Moat Focus Index reflects that firm's own research, with its analysts assigning "economic moat" ratings to companies they believe have special, long-term competitive advantages. Going further, he described the eligible universe that MOAT might invest in as a group of only about 145 companies.

The list is narrowed down for value. "A lot of investors want to own great companies, so they tend to trade at high valuations," Rakszawski said. "So the strategy tends to go toward those that are underpriced at any time."

The Morningstar analysts assign an "intrinsic value per share" for each eligible company, using a long-term discounted cash flow model. Then those values are compared with current stock prices as the index and the fund's portfolio are adjusted quarterly. The fund current holds 49 stocks.

An index such as the S&P 500 is weighted by market capitalization which means it is "rewarding success" as stocks of large-cap companies that soar can be weighted heavily. A typical equal-weighted approach to an index fund is meant to "allow smaller companies to participate," Rakszawski said. But MOAT's weighting approach is more about "allowing each stock to have its valuation dynamics play out for the portfolio," he said.

He summed up five sources of competitive advantages cited by the Morningstar analysts, as they assign economic moat ratings.

Switching cost — This benefits companies such as Salesforce.com Inc. CRM, +1.62%, which is held by MOAT currently. The cost of switching to another software provider includes the time spent making the decision, IT resources used to make the switch and retraining staff. It is typically easier not to make a move.
Intangible assets — These include intellectual property, brands, patents and government licenses. Rakszawski cited Starbucks Corp. SBUX, +2.77% as a company with a very strong brand. It is not currently held by MOAT. He also pointed to pharmaceutical companies "that can charge more" for patented brands.
Network effect — This is a competitive advantage that builds as a user base grows. "One of the more controversial holdings [of MOAT] is Meta, with its Facebook platform," Rakszawski said. Meta can benefit as its advertisers decide to spend more, based on increasing user traffic flowing from Facebook.
Cost advantage — "Morningstar looks at each company to see if they can keep their input costs lower, to realize higher margins or even to undercut competitors," Rakszawski said. He named Walmart Inc. WMT, +1.22%, an occasional holding of MOAT, as an example.
Efficient scale — Some markets are dominated by only one or two players. Examples include railroads, although MOAT holds none currently.
Don't miss: 11 stocks in the S&P 500 expected to form an exclusive growth club for investors

Enviado de Outlook para Android

Saudi Arabia Joins Shanghai Cooperation Organization As It Embraces China

por Tyler Durden

Zero Hedge / 2023-04-01 16:3513
Saudi Arabia Joins Shanghai Cooperation Organization As It Embraces China
While the US continues to splinter and cannibalize itself as it turns into a third world country, China is expanding its zone of economic and military influence that covers virtually all global commodity producers as it prepares for the next stage in the Sino-US cold war.

On Wednesday, Saudi Arabia's cabinet approved a decision to join the Shanghai Cooperation Organization, as Riyadh builds a long-term partnership with China despite - or perhaps due to - US security concerns. Saudi Arabia has approved a memorandum on granting the kingdom the status of a dialogue partner in the Shanghai Cooperation Organization (SCO), state news agency SPA said.

The SCO is a political and security union of countries spanning much of Eurasia, including China, India and Russia. Formed in 2001 by Russia, China and former Soviet states in Central Asia, the body has been expanded to include India and Pakistan, with a view to playing a bigger role as counterweight to Western influence in the region. Iran also signed documents for full membership last year.


Joining the SCO was discussed during a visit by Chinese President Xi Jinping to Saudi Arabia last December, sources told Reuters, adding that dialogue partner status will be a first step within the organization before granting the kingdom full membership in the mid-term.

The decision followed an announcement by Saudi Aramco which raised its multi-billion dollar investment in China on Tuesday, by finalizing a planned joint venture in northeast China and acquiring a stake in a privately controlled petrochemical group.

Participants of the Shanghai Cooperation Organization summit attend an extended-format meeting of heads of SCO member states in Samarkand, Uzbekistan
Riyadh's growing ties with Beijing have raised security concerns in Washington, its traditional ally but increasingly less so, especially following Biden's catastrophic attempts to force OPEC+ to boost oil production, an overture which backfired spectacularly and to global humiliation by the Biden admin.

Meanwhile, Washington says Chinese attempts to exert influence around the world will not change U.S. policy toward the Middle East, which of course is a lie.

Saudi Arabia and other Gulf states have voiced concern about what they see as a withdrawal from the region by main security guarantor the United States, and have moved to diversify partners, shifting their alliance to the biggest US challenger in the global arena. Washington says it will stay an active partner in the region.

Countries belonging to the organisation plan to hold a joint "counter-terrorism exercise" in Russia's Chelyabinsk region in August this year.

Tyler Durden Sat, 04/01/2023 - 11:00

Enviado de Outlook para Android