This year has gotten off to an interesting start for U.S. stocks. Shares of some small and struggling companies are being driven into the stratosphere, leaving some investors with serious FOMO (fear of missing out). But the best-seasoned investors will tell you to focus on well-managed companies benefiting from long-term growth trends.
If you have $5,000 that you don't need for your emergency fund or to pay for current expenses, and you plan on staying invested for the long term (at least five years, but the longer the better), then NVIDIA (NASDAQ:NVDA), Splunk (NASDAQ:SPLK), and NextEra Energy (NYSE:NEE) might be up your alley.
Here's more on why these three stocks are strong long-term buy-and-hold options for your investment portfolio.
Image source: Getty Images.
1. NVIDIA: The future is AI, and NVIDIA is all about AI
It's no secret this has been my top semiconductor stock for some time, and I don't see any reason for that to change any time soon. NVIDIA shot to new all-time highs last year, and its run higher is far from over if you look at its potential over the course of the next decade.
Granted, a company with a market valuation of over $320 billion and trading for a respective 21 times trailing 12-month sales and 76 times free cash flow is not exactly cheap. You should expect that management's stated outlook for revenue to increase 54% year over year during the final quarter of fiscal 2021 is already priced in, as is the expectation that double-digit-percentage growth will continue into the new year. But years of research and development at NVIDIA are only just beginning to pay off.
For one thing, the company is still in the early stages of cracking the massive data center market. The modern data center is the basic computing unit of cloud computing, an area of the tech industry that has become an absolute staple during the pandemic. Global spending on the cloud is expected to grow at a double-digit percentage clip for the foreseeable future, and it could reach $1 trillion a year by the end of the decade. With its hardware aimed at accelerating computing power and software packaged with it to make that hardware easy to deploy, NVIDIA's momentum in this department won't be easy to slow down.
Within the cloud computing universe is artificial intelligence, and NVIDIA's lineup is well-suited for these power-intensive computing applications. But currently, AI computing is mostly handled within data centers. In the coming years, NVIDIA envisions a world where AI is moved out of a centralized location and closer to the end-users, and even on the AI devices themselves. The pending acquisition of ARM Holdings from SoftBank -- a top licensor of chip designs prominent in everything from smartphones to automobiles -- could supercharge NVIDIA's efforts to bring next-gen computing to a myriad of new everyday uses. That kind of visionary thinking and a track record of delivering on innovation gets me excited about staying invested for the long haul.
2. Splunk: The cloud is here, but new tools to manage it are needed
Speaking of the cloud, organizations are now relying on a complex network of data centers and cloud-based services like never before. And as stated above, the pandemic has accelerated this trend. Cloud computing is a massive segment of the tech industry and one that could be considered its own stand-alone industry in a decade or two. Researcher Gartner expects global spend on public cloud services alone (versus a company's internally managed private cloud) to exceed $300 billion in 2021.
Put in simple terms, tech infrastructure is quickly evolving, and organizations need help securing and managing it all. That's where Splunk comes in. The company has long been the leader in big data software, helping its customers log activity and glean insights from findings. Splunk itself is in the process of migrating its services to the cloud, and the move has created some accounting effects investors had difficulty understanding in the last year. As a result, shares are down over 20% from all-time highs.
But Splunk has been a long-term winner for me, so I'm purchasing more shares after the recent pullback. After all, annual recurring revenue (ARR, a combination of old revenue and new cloud contracts on an annualized basis) increased 44% from a year ago to $2.07 billion during Splunk's last quarter. In the grand scheme of things, this is still a pretty small company operating in an emerging marketplace with massive potential ahead.
Splunk does have fast-growing competition in this realm of digital data management and security (including Dynatrace, which I also own), but I think there's plenty of room for multiple companies to thrive here. And while Splunk stock has underperformed its peers in the last year, I think that could change as it starts to lap the initial effects of its cloud software customer billing changes. Stay focused on Splunk's ARR progress, which the company expects will roughly double or more in a few years' time.
3. NextEra Energy: The largest utility company is also a leader in renewable energy
Shifting gears from hardware and software, I'm growing increasingly interested in renewable energy stocks. Many detractors have steered clear over the years because of a perceived lack of profitability, but the development of wind and solar has come a long way. Plus, the new Biden administration and renewable power-friendly policy could shine a light on renewable energy companies. And clean energy projects that are as profitable -- or more profitable -- as fossil fuels should remove the climate change debate from the equation.
Rather than get fancy with a pick, I'm starting with NextEra Energy, owner of Florida Power and Light Company -- the "largest rate-regulated electric utility in the U.S. as measured by retail electricity produced and sold." But there's a surprise: Fellow subsidiary NextEra Energy Resources is also the world's largest generator of power from wind and solar, as well as a leader in battery storage.
It's a big, boring utility company, but NextEra's development of clean power projects has been increasingly profitable over the last decade. For example, renewable subsidiary NextEra Energy Resources reported adjusted net income of $1.95 billion in full-year 2020, up from $1.70 billion in 2019. The renewables business generated operating profit margin of 25% last year. So much for the argument that renewable energy doesn't make financial sense. The consolidated company expects adjusted earnings growth of 6% to 8% a year through 2023.
Besides a steady-Eddie next-gen utility ownership stake, shares of NextEra also pay a dividend currently yielding 1.6% a year. There's room for that payout to continue growing. If you're in the market for some renewable energy growth and dividend income for the long term, this looks to me like a top bet in the space.
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January 30, 2021 at 08:45PM
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