We’ve done it, folks! Despite the months of March and April feeling like individual years by themselves, we’ve hit the halfway point for 2020.
There’s no question that the coronavirus pandemic has completely upended our social norms and instilled an exceptionally high level of volatility into the stock market. But at the same time, it’s also opened the door for opportunistic long-term investors to buy into some of the market’s best stocks at a discount.
Though the stock market is liable to remain volatile for the remainder of the year, and possibly beyond, the following companies represent the best stocks you can buy for the second half of 2020.
One thing you learn as an investor is that great businesses are consistently “expensive,” based on traditional fundamental metrics. In spite of this, you shouldn’t overlook point-of-sale and payment solutions company Square (NYSE:SQ), which is well on its way to becoming a financial technology juggernaut.
To be perfectly clear, Square is far from immune to the COVID-19 pandemic. This is a company whose seller ecosystem has been built around small and medium-size businesses since its founding — and it’s these small and medium-size businesses that have been hurt most by COVID-19. But you shouldn’t focus so narrowly on the performance of a few quarters. What we’ve seen from Square’s seller ecosystem over multiple years is that bigger sellers, in terms of annualized gross payment volume, are using the platform. If Square is successful in continuing to lure larger merchants, its fee potential in the consumption-driven U.S. market goes way up.
Yet it’s not the seller ecosystem that has folks excited about Square. Rather, it’s Cash App. Between December 2017 and December 2019, monthly active users (MAUs) more than tripled to 24 million from 7 million, with gross profit in the COVID-19-affected first quarter jumping 115%. With consumers opting to use digital wallets to avoid potentially virus-ridden cash, it’s quite plausible that Cash App’s MAUs are now well above 30 million. With the ability to link to Cash Card for use as a traditional debit card, invest directly from Cash App, and transfer to and from bank accounts, Cash App looks to be Square’s golden ticket to riches.
Palo Alto Networks
If there’s a trend that investors absolutely shouldn’t overlook during the COVID-19 pandemic, it’s the growing importance of cybersecurity. Mind you, cybersecurity was already a basic-need service long before the coronavirus upended societal norms. But with more people than ever working from home, the need to protect enterprise clouds from exogenous threats is heightened. That’s why Palo Alto Networks (NYSE:PANW) gets the nod.
Palo Alto is in the midst of a business transformation that’ll see it de-emphasize traditional firewall products in favor of subscription-based cloud protection solutions and support. Since revenue recognition for physical firewall products can be lumpy, moving to a subscription-heavy model will lead to improved margins and considerably better cash flow visibility.
Part of this transformation is being accomplished through organic investments in innovation, with the company also aggressively making bolt-on acquisitions to broaden its cloud protection portfolio and appeal to a larger swath of enterprises. Though these investments could weigh on Palo Alto’s bottom line in the near term, the reward for increased cloud-protection market share will be sustainable, high-margin, double-digit growth.
Green Thumb Industries
Cannabis stocks haven’t exactly been a blazing-hot investment over the past 15 months, but a few U.S. pot stocks are really starting to put things together. Among the pure-play pot stocks, few are looking more intriguing than multistate operator (MSO) Green Thumb Industries (OTC:GTBI.F).
Green Thumb is what we call a vertically integrated MSO, which is simply to say that it controls the seed-to-sale process for its cannabis. It has 46 open dispensaries in select legal states, with licenses to open as many as 96 retail locations in 12 states. In particular, Green Thumb has chosen to aggressively bolster its presence in Illinois, which opened its doors to recreational marijuana sales on Jan. 1, 2020, and Nevada via the Integral Associates acquisition. Despite Nevada’s relatively small population, its tourist industry could push the Silver State to the top of the pecking order in terms of cannabis spending per capita by mid-decade.
Another factor to absolutely love about Green Thumb Industries is that it’s generating around two-thirds of its revenue from derivatives, such as edibles, vapes, and topicals. Derivatives almost always have higher price points and much better margins than traditional dried flower. This focus on derivatives is a big reason Green Thumb looks to be knocking on the door of recurring profitability.
Finally, a list of the best stocks to buy in the second half of 2020 wouldn’t be complete without e-commerce giant Amazon.com (NASDAQ:AMZN), which is the stock I have pegged to hit a $2 trillion valuation before any other public company.
Amazon has been a significant winner in the COVID-19 pandemic given its virtually insurmountable U.S. e-commerce market share. Depending on your preferred source, Amazon controls approximately 40% of all online sales in the United States. It’s also had little issue growing its Prime membership count, which stood at north of 150 million earlier this year and may have pushed above 200 million globally due to the coronavirus crisis. While retail margins aren’t the best, Amazon leans on its marketplace as a way to keep consumers loyal to its ecosystem of products and services.
The long term for Amazon still belongs to its infrastructure-as-a-cloud service, Amazon Web Services (AWS). It has been growing considerably faster than Amazon’s traditional retail segment, which is great news since cloud margins are much higher than retail margins. In other words, as AWS grows into a larger percentage of total sales, Amazon’s operating income and cash flow will both increase dramatically. For context, AWS was responsible for 13.5% of total sales in the first quarter, but accounted for 77% of the company’s $3.99 billion in Q1 operating income.
Mark my words: Amazon to $5,000 becomes a reality by 2023.