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All Contents © 2019The Kiplinger Washington Editors
By Charles Lewis Sizemore, CFA, Contributing Writer
| October 2, 2018
The biggest challenge for many new investors is simply knowing where to start.
There’s no clear consensus on how to invest. Value investors will say the best stocks to buy are cheap ones and rattle off plenty of statistics to defend their stance. Growth and momentum investors will counter that investing in dominant growth stocks is the way to go. After all, you’re not too likely to find an all-star like Amazon.com (AMZN) sitting in the bargain bin.
What about dividends? Or share repurchases? Various studies have shown that focusing on these factors can generate solid returns.
Despite all the attempts to quantify investing, it is often more art than science. No single strategy is right for all investors. Some excel at charting and other forms of technical analysis, while some fundamentalists find bargains by digging into the minutiae of the financial statements. And there’s everything in between.
The best way for beginning investors to learn is to try a little of everything. You don’t have to get it right the first time, and you don’t have to put your capital at serious risk. So today, we’re going to look at five of the best stocks to buy if you’re new at investing. These may or may not beat the market over the next year. It would be fantastic if they did, but that’s not our point here. We’re simply looking to learn the ropes.
Data is as of Oct. 1, 2018.
Market value: $47.3 billion
Sector: Consumer discretionary
Value investing has trounced all other disciplines of investing over the years, at least according to several academic studies such as Fama and French’s landmark 1992 paper “Common Risk Factors in the Returns on Stocks and Bonds.”
But there is no such thing as a free lunch. While value stocks may outperform over time, they can be painful to hold. Sometimes cheap stocks keep getting cheaper.
Consider automaker General Motors (GM, $34.20), which trades for about $34 per share. It’s one of the cheapest large-cap stocks in America right now, trading for just 5.5 times expected 2018 earnings and 0.3 times sales. To put that in perspective, the Standard & Poor’s 500-stock index – a group of 500 companies considered to be reflective of the American economy – trades for 18 times expected 2018 earnings and 2.3 times sales.
However, GM also looked cheap by these same metrics back in July, when it traded for more than $44 per share.
Value investing can be frustrating, but General Motors is worth a try. GM clearly is undervalued by most traditional metrics, and you’re being paid to wait while Wall Street figures that out. The company pays out 38 cents per share in cash dividends on a quarterly basis, which translates to 4.4% of the value of the current share price every year. That 4.4% is GM’s “dividend yield,” and it’s more than twice what the average S&P 500 company pays out right now.
Market value: $979.1 billion
Amazon.com (AMZN, $2,004.36) requires the largest chunk of change for any stock on this list, at roughly $2,000 per share. But anyone starting out with a decent-sized nest egg should consider buying arguably the single greatest growth stock of our lifetimes.
Amazon also is arguably the single most disruptive company in more than 100 years. Amazon revolutionizes every industry it touches, turning them upside down. First, it was the sleepy world of book retailing, where Amazon upended Borders and Barnes & Noble (BKS). Then it was electronics and general retail, which hit Best Buy (BBY), Walmart (WMT) and every other major retailer hard. More recently, it was the launch of cloud services via Amazon Web Services that eviscerated traditional information services companies such as International Business Machines (IBM).
“We’ve owned Amazon.com in many of our growth portfolios for a long time,” says John Vann, an RIA based in the Dallas area. “Amazon has continued to defy skeptics wary of its high valuations by constantly finding new avenues for growth. Founder Jeff Bezos is one of the great visionaries in the history of American business.”
Amazon’s stock price has more than doubled over the past year and even briefly eclipsed $1 trillion in market value. It remains to be seen whether a company this large can continue to grow at this blistering a pace. But that’s not the point. For a new investor, few companies are as exciting to watch as Amazon.
Market value: $16.4 billion
Goal: Dividend income
Sector: Real estate
Amazon.com is a growth miracle, but it’s also a wildly volatile stock. That kind of investing isn’t for everyone. A far more conservative option is Realty Income (O, $56.60), a retail-focused real estate investment trust (or REIT, which you can learn more about here).
Realty Income owns a portfolio of more than 5,400 properties scattered across 49 states and Puerto Rico. Its typical tenant is a convenience store or pharmacy – the sort of local, high-traffic businesses that are largely technology-proof.
Realty Income is the anti-Amazon. It’s focused on brick-and-mortar retail properties rather than internet commerce, and a large portion of its return comes from its dividend. It’s a low-heartburn stock appropriate for proverbial widows and orphans.
It’s also a good option for any investor looking to explore dividend-focused investing. Realty Income pays an even higher yield than GM, and instead of a quarterly dividend, it pays out every month. Moreover, Realty Income is a fantastic dividend growth stock – it has raised its dividend for 84 consecutive quarters and counting.
This is the kind of stock that allows you to conservatively grow your wealth over time through steady performance and dividend compounding.
Market value: $532.6 billion
Goal: Broad U.S. exposure
If you don’t quite feel ready to pick individual stocks, why not have the greatest investor of all time do it for you?
Berkshire Hathaway (BRK.B, $214.78), a conglomerate run by the legendary Warren Buffett, is less like a stock and more like a concentrated mutual fund that specializes in value stocks and illiquid private businesses.
It’s no secret why they call Warren Buffett the Oracle of Omaha. His track record over the years is the stuff of legend. From 1964 through the end of 2017, Buffett generated annual returns of 20.9% – more than double that of the S&P 500’s 9.9%. Buffett’s cumulative returns over that time were an astonishing 1,088,029%. That compares to 15,508% for the S&P 500.
Buffett doesn’t beat the market every year, of course, and over the past five years he’s actually trailed the market slightly. But in buying Berkshire Hathaway, you get access to the investing wisdom of a living legend.
Buffett traditionally avoided technology companies as he preferred to stay away from things he didn’t understand. Yet today, Apple (AAPL) is his single largest position, accounting for 24% of Berkshire Hathaway’s traded stock portfolio. The remainder of his top five is rounded out with Wells Fargo (WFC), Kraft Heinz (KHC), Bank of America (BAC) and Coca-Cola (KO).
When you buy Berkshire Hathaway, you’re getting a broad swath of the American economy.
Market value: $183.7 billion
Goal: International exposure
American stock prices are driven by numerous factors too complex to list. Frankly, the list would never end, as the potential risks facing every stock is theoretically limitless.
But no matter how complex American stocks might seem, international stocks are even more so. In addition to all the risks you’d find with an American stock, you also have currency fluctuations, tariff concerns and political developments a world away to contend with.
All the same, the United States accounts for only 15% of the world economy. That means if you limit yourself to American stocks, you’re potentially missing out on many overseas opportunities.
If you want to get your feet wet globally, consider shares of Toyota (TM, $124.82). Toyota, along with Volkswagen (VLKAY) and Renault Nissan, is a perpetual contender for the title of being the world’s largest automaker by sales. The shares trade on the New York Stock Exchange as well as in Tokyo.
And at current prices, they’re priced rather attractively at just 8.3 times earnings and 0.7 times sales.
Charles Sizemore was long GM, O and TM as of this writing.