The new year represents a great time to invest in stocks. Not only is it when many people are setting New Year's resolutions, but it's also a good reminder of the limited-time investors have to make qualifying IRA contributions. Of course, the challenge for those who are considering investing in stocks as the New Year comes and goes is deciding which stocks to invest in.
For patient investors willing to invest for the long haul, a great place to start their search is with established and profitable market leaders. Three good examples of quality companies who have carved out strong leadership positions in their markets are Apple (NASDAQ: AAPL), Walt Disney (NYSE: DIS), and Amazon.com (NASDAQ: AMZN).
Here's why these stocks represent compelling long-term investments -- and why you should consider buying them today.
Image source: Getty Images.
As the world's most valuable publicly traded company, some investors might assume there's little upside left for the tech giant. But this couldn't be further from the truth.
Not only is Apple still growing, with management guiding for all-time record quarterly revenue in its first quarter of fiscal 2018 of $84 to $87 billion (up 7% to 11% compared to the year-ago period), but earnings per share are rising even more sharply -- a trend that looks poised to continue thanks to the company's hefty free cash flow that enables it to spend billions repurchasing its shares. Apple's earnings per share in the trailing 12 months has risen 11% year over year, and EPS in Apple's most recent quarter jumped 17% year over year.
Best of all, investors can buy Apple at a conservative valuation. The stock currently has a price-to-earnings ratio of just under 19. This compares to an average P/E of 25 for stocks in the S&P 500.
Unlike Apple, Disney has struggled to grow revenue and EPS recently. Revenue and EPS in the trailing 12 months are both down about 1% year over year. However, year-to-year volatility of the company's studio entertainment business is one of the main reasons for this decline -- and a 10,000-foot view of the segment suggests the pullback in segment operating income is only temporary. Last year, Disney benefited from the blockbuster success of the Star Wars franchise, making comparisons in fiscal 2017 difficult. But thanks to Disney's large portfolio of powerful movie franchises and an ever-growing pipeline of new releases, the company has proven time and time again it can set new records.
Chris Hemsworth as Thor in Thor: Ragnarok. Image source: Walt Disney.
Looking ahead, Disney is positioning itself to better monetize its content while simultaneously removing some of the volatility of its studio business. By launching its own streaming services -- an ESPN service early next year and a Disney-branded service in the second half of 2019 -- Disney can bring its content directly to consumers, offer a better experience, and raise prices over time as it builds out its content libraries.
Of course, investors who buy Disney are taking on some risk by betting management can turn around declining operating income at ESPN. Disney CEO Bob Iger suggests this won't be a problem as the company capitalizes on the opportunities provided by an evolving media landscape. But it's possible that headwinds at ESPN prove to be more permanent than management anticipates.
Helping account for some of the risk of reinvigorating its ESPN business, Disney also trades conservatively, with price-to-earnings ratio just under 19.
Amazon's growth has surprisingly reaccelerated recently, proving the company's aggressive investment strategy is paying off. Revenue in its third quarter climbed 34% year over year, or 29% year over year when excluding sales from Amazon's recently closed acquisition of Whole Foods. Revenue in Amazon's second and first quarter of 2017 and its fourth quarter of 2016 increased 25%, 23%, and 22% year over year, respectively, driving home how nicely growth has reaccelerated. And looking to Amazon's fourth quarter, the company has guided for revenue to rise a wild 28% to 38% year over year.
Image source: Amazon.com.
This acceleration in revenue growth comes as Amazon has been investing aggressively in its international expansion, new fulfillment centers, digital content, and its highly profitable Amazon Web Services business. With growth reaccelerating, investors should be encouraged by management's ongoing commitment to making ambitious investments in its growth areas -- something management remains committed to.
Investors will have to pay a significant premium to buy into Amazon's growth story. The stock has a price-to-sales ratio of 3.5, compared with an average price-to-sales ratio of 2.8 in the specialty retail industry -- an industry that includes peers like eBay, Best Buy, and Alibaba.
Of course, investors who buy Amazon are betting the e-commerce giant can boost its profit margin over time and significantly increase its earnings. This expectation is particularly evidenced by the stock's price-to-earnings ratio of nearly 300. Fortunately, Amazon has already demonstrated its adeptness at multiplying profits over time; its trailing-12-month net income of $1.9 billion dwarfs its net income of $600 million in 2015 and its loss of $241 million in 2014.
Most importantly, all three of these companies possess significant competitive advantages. Apple boasts industry-leading pricing power and profitability thanks to its powerful brand. Disney commands pricing power and customer loyalty by wielding its globally renowned intangible assets and its reputation for quality entertainment. And Amazon's economies of scale in both e-commerce and commercial cloud services is unmatched.
Combining their strong competitive advantages with expectations for further growth at all three companies, these are the sort of stocks that have a good shot at beating the market over the long haul.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Apple, eBay, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.