Posted in Marijuana Investments

3 Monster Stocks in the Making

 Posted by  Posted on March 9, 2021

a man holding a sandwich in his hand: 3 Monster Stocks in the Making © Provided by The Motley Fool 3 Monster Stocks in the Making

As we’ve seen this year, the market goes up and down, putting solid long-term stock picks at a premium over short-term gains.

The best bet is to look for stocks that are already dominating their sectors and have the wherewithal to increase earnings well into the future.

Trulieve (OTC: TCNNF), Yum China Holdings (NYSE: YUMC), and Square (NYSE: SQ) all provide opportunities because they are well-known players in markets that should benefit from trends already in existence.

Trulieve is one of the few profitable cannabis stocks in an industry that inexorably will grow as more states open up to medical and adult-use sales. China set its GDP growth rate at 6% this year, with economists predicting that to be a conservative estimate, and Yum China’s fast food sales are certainly a part of that growth. Square has already made its mark as a disrupter in fintech, and its revenue growth over the past five years appears to be speeding up rather than slowing.

a man holding a sandwich in his hand: Man holding a double-decker hamburger © Getty Images Man holding a double-decker hamburger

Trulieve shows the potential in cannabis

Everyone talks about the potential in cannabis stocks. Trulieve (OTC: TCNNF) is already delivering on that potential. The stock is up more than 378% over the past 12 months. It’s the largest cannabis company in Florida, garnering 50% of that state’s market share in marijuana sales, and 73 of its 78 retail locations are in the Sunshine State.

Trulieve also operates in five other states: California, Massachusetts, Connecticut, Pennsylvania, and West Virginia. The company began showing a profit four years ago, and in the third quarter it had adjusted EBITDA of $67.5 million, the company’s 11th consecutive quarter of growth and increased profitability.

In a recent investor presentation, the company said it expects between $465 million to $485 million in revenue in 2020, compared to $252.2 million in 2019, which at the low end would mean an increase of 84%. 

Yum China Holdings keeps rolling, despite headwinds

Yum China Holdings is synonymous with growth. The company, a 2016 spinoff from U.S.-based Yum! Brands, began with one store in 1987 and is now the country’s largest restaurant company with 10,506 restaurants across 1,500 cities in mainland China. 

Shares in Yum China are up more than 40% over the past year. The company operates several well-known fast food brands in China, including Pizza Hut, Kentucky Fried Chicken, and Taco Bell. Dining out was a casualty of the pandemic nearly everywhere, but China is showing signs of rebounding more quickly than other nations in terms of opening up restaurants and other businesses.

Yum China’s revenue for the year was a reported $8.26 billion, a 6% decline, year over year, but thanks to improved margins, the company said it made $713 million in net income, a 10% gain over 2019. Business appears to be picking up, as well. In the fourth quarter, reported sales were $2.26 billion, up 11% over the same period in 2019.

The company also said that its operating profit increased to $180 million in the quarter, a gain of 90% year over year. Yum China is growing rapidly with 1,165 new stores last year, and plans to open up 1,000 more this year.

Gallery: 10 S&P 500 Stocks to Consider … At Much Lower Prices (Kiplinger)

a man flying through the air while riding skis: Analysts might have been bullish about the S&P 500's stocks heading into 2021, but they weren't exactly exuberant. According to a December report by FactSet Vice President and Senior Earnings Analyst John Butters, analysts' average projection has the S&P 500 Index hitting 4,000.28 by the end of 2021. If the estimate pans out, 2021 would be third consecutive year of positive returns for the index … albeit at a good-but-not-great 6.5% growth rate for the year. That same report, however, points out that between 2005 and 2019, analysts overestimated the index's end-of-year value on 12 of 15 occasions, by an average of 9.3%. Butters noted that if you applied that 9.3% overestimation to 2021 price targets, the S&P 500 would close 2021 at 3,627.96. If you applied an average 3.4% overestimation (which backs out 2018), you'd get a closing value of 3,864.07. SEE MORE The 15 Best Value Stocks to Buy for 2021 Either way, from current prices, that implies the S&P 500 might be overcooked. But the aggregate analyst estimate for the S&P 500 is calculated by combining all of the analyst median target price estimates for all the companies in the index. If they're wrong about the index 80% of the time, that means they're likely wrong about many of the S&P 500's stocks themselves. Today, we're going to look at 10 S&P 500 stocks that are sound investments for the long haul, but have gotten well ahead of themselves. We'll look at several metrics, but one that some investors might be less familiar with is cyclically adjusted price-to-earnings ratio, or CAPE. It was created years ago by Yale University economist Robert Shiller, and thus it's also dubbed "Shiller P/E." The CAPE metric takes a stock's average earnings for the last 10 years, adjusts those earnings for inflation, and then divides that number into its current share price. CAPE takes out any big swings in profits to give investors a more accurate picture of its current price-to-earnings valuation. The S&P 500 currently trades at a Shiller P/E of 35.7, which is among its highest valuations in history. However, eight of the 10 S&P 500 stocks on this list are far more expensive, with CAPEs in excess of 100; the other two are within striking distance. SEE MORE 65 Best Dividend Stocks You Can Count On in 2021 Data is as of Feb. 11.

chart, histogram: YUMC Chart © Provided by The Motley Fool YUMC Chart Data by YCharts.

Square stock is a bankable opportunity

Square has increased its revenue every quarter, like clockwork, for the past six years since the fintech company went public in 2015. In the fourth quarter, the company reported $3.16 billion in revenue, an increase of 141% year over year. This past year, it reported $9.5 billion in revenue, a raise of 101% year over year. 

The company’s services and subscription-based revenue, excluding its sale of Caviar, grew 74% in 2020, thanks in large part to the company’s Cash App. In January alone, the company said it was used by 36 million people, a rise of 56% over the prior year.

Square did well during the pandemic, but I think it has also set itself up well post-pandemic, as many of its sellers who turned to the company for help with their e-commerce will continue those strategies to boost revenues even after things open up.

Earlier this week, Square said it was opening its own bank, Square Financial Services, which will provide small business loans. The company had already been providing business loans through its Square Capital division, but now will no longer have to partner with other lending institutions for those loans.

The company has also been smart with its Bitcoin purchases. It bought $170 million of Bitcoin in the fourth quarter and said the cryptocurrency now makes up 5% of the company’s cash, securities, and cash equivalents. The company said that 48% of total consolidated net revenues in 2020, and 85% of

the total increase in consolidated net revenues in 2020, were due to Bitcoin’s rise.

Plenty of good choices

I see good long-term prospects for all three stocks.

Of the three, I like Square the best. Its shares have risen 208% over the last 12 months and show no signs of slowing down. The company has shown an ability to leverage its brand while branching out into other revenue streams with few missteps.

Yum China, while it doesn’t have the profit margins of Square or Trulieve, may be the safest bet of the three to do well this year as more people in China return to fast food restaurants. Trulieve also has plenty of untapped prospects as it expands into other states besides Florida.

Jim Halley owns shares of Square. The Motley Fool owns shares of and recommends Square. The Motley Fool has a disclosure policy.

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Author: CSN