Like all things in life, when it comes to investing, hindsight is always 20/20. It is easy to look at the chart of a stock like Amazon.com’s (AMZN) over the last five years and second guess why we didn’t put all our eggs in that basket but seeing into the future is much more complex.
There are no crystal balls on Wall Street, and any of a number of things can lead a stock into a long-term bullish run just as easy as it can lead to a sharp selloff that a stock is never able to recover from.
While it is impossible to know what the next five years holds, there are ways to put yourself in the best possible position to make sure you can outperform the market and hold positions in your portfolios that you will be glad you had the foresight to own.
The one thing that Wall Street loves more than anything is growth. In order to ensure a successful portfolio, you HAVE to make sure that you put your money to work in companies that have not only shown an ability to grow their business but have what it takes to continue posting strong growth numbers down the road. As long as a company is able to grow Wall Street will remain upbeat and allow shares to keep pace the overall market if not outperform.
Finding sector leaders is another great approach since they tend to fend off competition better and have greater economy of scales to withstand possible sector weakness.
Here are five stocks that look attractive now and you may wish you owned five years from now.
There are few companies with a greater control of their sector than Alphabet (GOOGL). The parent company behind search engine giant Google has long controlled online search, and is also a major player in cloud computing sector which is one of the fastest growing sectors in tech. While Google has not hit the level of powerhouses like Microsoft and Amazon in cloud computing, it has carved itself a nice piece of the pie, and if it decides to really focus on growing its enterprise cloud business it could easily find itself as one of the top cloud companies in the market. As for online search advertising, Google has just one big competitor in Facebook (FB), and while Facebook has managed to pose a serious challenge to Google, Google remains the top player, and it is hard to imagine another company rising to its level in the years to come. The company has grown its earnings by 13.1% per annum over the last five years, and analysts expect additional average annual earnings growth of 18.1% a year over the next five years which should keep shares moving higher.
Amazon.com (AMZN) has been one of the top stocks over the last five years, and investors that thing they have missed the boat and are afraid to buy the stock near its highs could be greatly disappointed five years from now. The company is not only the clear leader in e-commerce, it is also one of the top two cloud computing companies along with Microsoft (MSFT). Amazon has always proven an ability to see into the future and move in the right direction to keep its revenue stream growing. It has recently made big moves into the pharmaceutical and grocery sectors and has big plans for its streaming business to become a primary revenue driver on the success of its Echo and Alexa devices. After growing earnings by an average 66% a year over the last five years, the company is expected to grow earnings by an additional 46% per annum during the upcoming five years. AMZN is an exception to the rule of buying a stock with a high valuation simply because the stock has always traded at high multiples, and its current forward P/E of 74 is not very high considering where it has traded in the past. The market understands how strong Amazon has become, and it is willing to buy into the stock’s high valuation due to its amazing growth potential moving forward. The stock is trading at $1,880.75 with an average price target of $1,990.39.
Video streaming giant Netflix (NFLX) is another example of a stock that on the surface looks overpriced, but once digging a little deeper appears to have a lot of upside. Trading near its all-time high, NFLX has a forward P/E of 74, which at first glance seems high, but with earnings expected to rise by 62.4% per annum over the next five years the valuation is reasonable, and the market has always been willing to buy into the stock with a high valuation. Netflix is not only the leader in streaming video in the U.S., but its international expansion has been occurring much quicker than anyone expected. Netflix was quick to realize original content would be a driving force in its future, and it has invested heavily in building a strong library of original content that has not only helped it maintain customers but add new customers at a brisk pace. NFLX is currently trading at $325.64 with an average price target of $373.58.
Mega-retailer Target (TGT) ran into trouble in 2016 and the first half of 2017, but Wall Street started to take a bullish view on the company the middle of last year and have driven shares to an all-time high. Management rightly understood the importance of the customer experience, and the company is doing a good job updating its stores to create a better customer experience. The changes have been working, and in-store sales have improved. Another area where Target fell behind the competition was its online business. While online sales still account for a very small amount of its overall sales, they are growing as the company invests heavily to better compete against online giant Amazon (AMZN) and its closest competitor Wal-Mart (WMT). As Target becomes a more powerful online player, the market will keep pushing the stock higher. TGT is currently trading at $83.28 with an average price target of $80.75, but if the company is able to post better than expected quarterly numbers when it reports on August 22 analysts will likely adjust their targets higher to allow for additional upside. The consensus calls for earnings of $1.39 per share, but the street has a whisper number of $1.42 for the quarter.
Wells Fargo (WFC) is a bit of a gamble given the recent scandals regarding cross-selling and fake accounts its employees were creating to meet sales goals. Wells Fargo is certainly not out of the woods just yet, but the worst appears to be behind it, and once it is able to put the scandal in its rear-view mirror the future should be bright. Wells Fargo is one of the world’s richest banks, and the recent weakness provides a good opportunity to buy shares of the bank at a nice discount. Wall Street usually has a short memory, and the scandals will be forgotten if the bank is able to play fair moving forward and take advantage of the strong economy and rising interest rates which should be a major boost to all the big financials. Analysts expect the company to grow earnings by 9.6% per annum over the next five years, and with the stock currently trading a low 11.3 forward P/E, there is a lot of upside for the next five years as long as the company is able to avoid more scandals and negative headline. The stock has an average price target of $64.04 and is currently trading at $58.93.