There is absolutely no doubt that 2020 will be a year that investors will never forget. In a few weeks in late February and early March, the US stock market went from humming to historic highs to the fastest bearish territory in history (only 17 trading sessions) following the coronavirus disease 2019 (Covid pandemic. 19 Ultimately, the S&P 500 lost 34% of its value in just 33 calendar days.
While the sale of panic can certainly be troubling if you are a short-term trader, it has always been an opportunity to buy big companies at a discount if you are a long-term investor. Throughout the 33 calendar day decline in the overall market in February and March, I took the opportunity to add a few new companies to my investment portfolio.
The problem is that I could not buy near enough of a stake in five great stocks which I believe have the potential for game-changing in the long run. Now that the money is ready, I plan to focus on the following five actions during the next correction.
The first high-caliber company in which I look forward to buying a larger stake is the developer of surgical systems Intuitive surgery (NASDAQ: ISRG), a company I called “the closest thing to a safe investment.”
The best thing about Intuitive Surgical is the fact that the company’s operating margins are designed to improve over time. While it may seem like selling expensive da Vinci surgical systems would be a big thing for the company, these systems are very complex to build and don’t give the best margins. Instead, Intuitive Surgical generates most of its margins and profits by selling instruments and accessories with each procedure, as well as by servicing its installed machines. In other words, as the number of da Vinci systems installed around the world increases, these higher margin revenue sources will become a higher percentage of total sales, thereby increasing operating margins.
It is also encouraging to know that the competitive staves of Intuitive Surgical are practically insurmountable. It closed the first quarter with 5,669 da Vinci systems installed worldwide, more than all of its competitors combined. Emphasize that Intuitive Surgical is just scratching the surface in terms of market share for soft tissue surgery, and you will understand why I am so enthusiastic about running this business.
There could not be a more disruptive business in the area of financial technology than Square (NYSE: SQ). While I was able to get Square’s shares at a ridiculously attractive price (under $ 40) during the March Panic Sale, I don’t think I have almost enough in my portfolio compared to what I think that society is capable of in the long run.
As you can imagine, most people are part of Square’s seller ecosystem, which had $ 106 billion in gross payment volume (GPV) flowing through its network in 2019. What’s particularly interesting, however, is that Square sees larger companies with a higher annualized GPV using its point of sale platform. If Square can continue to attract larger companies to what is already a consumer-driven economy, its impressive growth rate could accelerate even more.
Additionally, Square’s Cash app has proven to be a growth beast in the past two years. The number of active users has more than tripled in the past two years, with gross profit skyrocketing by 115% in the first quarter of 2020 compared to the previous year. With Cash App users able to send and receive money, invest directly from their account, and link their account to Cash Card, Square could easily double its sales and profits over the next three years.
Social media is another segment where big gains can be made in the long run. Although I also bought Facebook during the March slowdown it’s Pinterest (NYSE: PINS) who has my full attention. In my opinion, Pinterest is an opportunity for investors like me who missed the Facebook race to have a second game-changer in the social media space.
While one finger may focus on the somewhat slow growth of Pinterest users in the United States, what investors should realize is that international growth is what is so exciting in this business. Over the past five quarters, Pinterest’s user base has grown by 102 million monthly active users (UAMs), with approximately 90% of these MAUs coming from international markets. Last year, the average income per user (ARPU) of international users more than doubled from $ 0.25 to $ 0.54. If Pinterest succeeds in continuing to build its MAUs abroad and improving engagement, there is no reason why the increase in advertising dollars cannot lead to an international ARPU growth of 400% or more over the next decade.
The story of Pinterest’s growth also relates to e-commerce. With users already focused on sharing their interests, Pinterest aims to capitalize on this by helping small and medium businesses reach a larger pool of potential consumers. If Pinterest succeeds in creating a healthy source of revenue from e-commerce, it will only strengthen the company’s dominant sales growth approach to advertising.
There are not many companies that I have beaten the drums more in 2020 than the health solutions provider Livongo Health (NASDAQ: LVGO). For one thing, I still appreciate the instant gratification of being up more than 160% on a purchase made just over two months ago. But on the other hand, the Warren Buffett in me is bored, because I want to own a lot more Livongo Health than I currently have.
What makes Livongo Health stand out is its approach to helping people with chronic diseases, such as diabetes and hypertension. Using mountains of aggregated data and artificial intelligence, Livongo is able to induce behavioral changes in patients with chronic diseases to help them lead healthier lives. Remember, it’s not just the comorbidities associated with chronic conditions that concern patients. Their ability to control their illness also plays a big role.
Perhaps the best part of Livongo Health is that its unique approach to personalized medicine gives incredible results. The number of Livongo Diabetes members effectively doubled year-on-year to more than 328,000 in the first quarter, with the company making its second consecutive surprise quarterly profit. Livongo has not even entered 1% of the US diabetes market yet, but is already turning the page on profitability. It will be an absolute juggernaut for a long time to come.
And of course I can’t forget Amazon (NASDAQ: AMZN). Even though the e-commerce giant is already one of the largest companies in the world, its growth in operating cash flow is simply worth drooling.
Most people are probably familiar with Amazon’s retail ecosystem, which, along with advertising and streaming content, makes up the bulk of the business’s revenue. According to Bank of America Justin Post analyst, Amazon won about 44% of the US e-commerce market share in 2019. For context, Walmart was a very distant second with 7%. Amazon’s low overhead, complex logistics, and more than 150 million Prime memberships worldwide ensure consumers stay in the Amazon product ecosystem.
However, e-commerce is not the reason that Amazon’s operating cash flow will explode in the years to come. Rather, it is Amazon Web Services (AWS). AWS is Amazon’s infrastructure as a service offering, which went from 11% of total sales in 2018 to 13.5% of total sales in the first quarter of 2020. Since cloud service margins are significantly higher than retail and advertising margins, Amazon’s operating cash flow is expected to soar, with AWS becoming a larger component of total sales.