I mostly do index funds, but I do own a few individual names. For me to own an individual stock, it’s got to have an outsized opportunity. If it’s just a value stock or a dividend stock, well, I figure my index funds own those names to a sufficient degree. Why own them individually?
As such, these names have to be fast growers and have to have a business that I think is under-appreciated. Under-appreciated is a tough label considering that just about any fast growing company is “expensive” from fundamental analysis perspectives. For instance, all three of the following stocks have very high PE ratios. But, as always, Amazon is my favorite example of why I’m ignoring this. For the last decade, Amazon has never not been expensive by traditional measures. And it just kept growing and growing. And the stock kept going up and up. If you used traditional fundamental analysis, you would have never purchased Amazon’s stock. It was always expensive.
That doesn’t mean I buy all expensive stocks. Hardly. Again, the majority of my assets are in index funds, and I don’t let any single stock get larger than, perhaps, 5% of my total assets. This is just some personal risk management rules I put in place.
So, here are the three stocks I like long-term. This isn’t a full breakdown of why I like these stocks, but it’s a “cliff notes” version.
Simply put, Netflix is the global leader in the transition from the previously dominant cable entertainment paradigm to the on-demand video world. Its head start against all competition means it has a pipeline of continuous capital injections in the form of subscription fees from 200 million subscribers all over the planet. This capital moat means Netflix is continuing to push the pedal down and is going for domination in a “winner take most” global on-demand entertainment market. Yes, Disney has its place due to its extraordinary IP, but most of the competitors you see out there in streaming will throw in the towel in the years ahead. Want a good example of Netflix’s position of strength vs. most of its competition? Netflix is raising prices in many markets around the world while competitors like HBO Max and Paramount+ are offering discounts to attempt to get users to sign up. Even Disney which I believe has a bright future is practically giving away its service for free (it has a way lower ARPU than Netflix).
One more thing. Netflix annihilated the major thesis for bears this past year when it flipped from negative free cash flow to positive free cash flow. Yes, this is due to the pandemic pulling forward a great deal of demand, but this is a wonderful thing for subscription businesses. It accelerates the business and gives it further strength to keep going. Netflix reached critical mass and is done borrowing money. They cannot be stopped.
Netflix is trading at $511 as of writing, and is off 13.8% from its highs of $593.
I love platform plays with secular tailwinds. Just like Netflix has the tailwind of a disintegrating cable TV business and long-term shift to on-demand video, Shopify wins with the long-term shift of more and more spend going away from brick and mortar and into ecommerce. Shopify basically enables all of the non-Amazon businesses and merchants to sell effectively online. They are an incredible company with strong execution and basically doubled revenues this past year.
Shopify is trading at $1,127 as of writing, and is off 24.8% from its highs of $1499.
Most users know Spotify as a great way to listen to music. For most young people, it’s a bit of a utility. You just pay it every month. But the most interesting things going on at Spotify are around podcasts and the innovations they are doing from a technical perspective. Podcasts remain one of the least monetized forms of entertainment despite its use skyrocketing. Simply put, there is a gap between how much audio is consumed and how much it is monetized. Spotify is the company investing the most into bridging this gap, and when they do, they’ll take a cut of all of it. Again, a platform play. Like the other companies, Spotify is focused on winning long-term, investing heavily in the future. I love it.
Spotify is trading at $284 as of writing, and is off 26.7% from its highs of $387.
Could these stocks keep going lower?
Of course. That’s the stock market. But if you liked these stocks a few weeks ago at way higher prices, you should love them here, no? I love them here. I don’t care about what happens short-term. I want to own these companies for years. But that’s the discipline. If you can’t keep that discipline, then buying individual stocks probably isn’t for you. Consider sticking with passive, index investing (which is still a great way to invest).