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I Just Bought More Of These 3 High-conviction Stocks. Here's Why
Many successful investors regularly invest new money. It's an under-appreciated, winning approach to the stock market.
Here's why this approach is helpful: Individual stocks are prone to ups and downs. Furthermore, long periods of flat returns can unexpectedly be followed by sudden bursts higher. Additionally, new companies go public and new industries emerge, giving investors fresh opportunities.
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In short, regularly putting new money to work allows investors to benefit from price swings, accumulate shares, and explore new ideas. It's a better approach than just investing everything in one idea at a single moment in time. And it's why this principle is part of The Motley Fool's investing philosophy.
Given that this is important, I always look for something to invest in right now. Buying a new stock is often tempting. But I also like to look over my existing portfolio to see how much money I've invested in my highest-conviction ideas. This exercise often shows me that I need to buy more of something I already own.
After a portfolio review in January, I concluded I didn't own nearly enough of short-term rental platform Airbnb (NASDAQ: ABNB), energy-drink company Celsius (NASDAQ: CELH), or discount retail chain Dollar General (NYSE: DG). Here's why these are three high-conviction ideas I just bought more of.
1. Airbnb
As an avid user, I enthusiastically bought shares of Airbnb shortly after it went public. But after reviewing my portfolio, I realized I haven't invested new money in Airbnb stock in over three years, and it accounted for less than 2% of my portfolio's value. Given my high conviction here, I wanted Airbnb stock to account for a greater percentage than that, so I bought more.
My high conviction with Airbnb stock starts with its rock-solid business. There's a lot of value in a marketplace that gobbles up both supply and demand, and that's what it's done. With over 8 million active listings worldwide, it certainly has supply. And with 123 million nights and experiences booked in the third quarter of 2024 alone, it has incredible demand from travelers.
For every transaction, Airbnb gets a cut, which is a high-margin revenue stream. In fact, over the last 12 months, it's generated $4.1 billion in free cash flow, which is a head-turning margin of 38%.
This alone is a compelling reason to own Airbnb stock, in my opinion. But my conviction is heightened because of how management is viewing free cash flow. The core business is solid, so it's investing its resources in new business ideas that may or may not relate to travel at all. In short, it's going to try many big ideas to grow that top line long term. And with billions of dollars to work with, the odds of it developing successful new business segments is high.
2. Celsius
I'll acknowledge the elephant in the room: Celsius stock is up nearly 1,200% over the last five years, but I invested after its big gains in recent years. The stock is now down more than 70% from its all-time high, and I waited to buy until its stock price was too cheap for me to ignore. That said, it's continued to drop further from what I believed was a good price. That's why I decided to buy even more.
In the third quarter of 2024, Celsius reported a 31% year-over-year drop in revenue -- its first reported drop in multiple years. And investors are worried that competition is heating up and hurting sales. But Celsius says it's simply a timing problem with its main distributor, and its sales data suggests it's still taking some market share in the space.
I bought more Celsius stock believing that these things are true, which would consequently mean its business is still healthy. If my assumption is correct, then I feel very good about the company's ongoing growth potential. For example, 95% of the company's revenue is from North America through the first three quarters of 2024. Therefore, international growth is a huge, untapped opportunity, and it's entered various new markets within the past year.
Moreover, competition may be fierce, but Celsius is in a better competitive position than most, thanks to its balance sheet and income statement. The company has over $900 million in cash and zero long-term debt, and has still profited $164 million on a net-income basis year to date. When it comes to competing against smaller, upstart brands both at home and abroad, Celsius is in a good place.
3. Dollar General
When it comes to buying more Airbnb stock and more Celsius stock, future growth was certainly my top consideration. But I believe balancing a portfolio with some solid dividend stocks is a good approach, and I bought more Dollar General stock with the dividend in mind.
When earnings are greater than dividend payments, dividends are sustainable. Investors need to be aware that Dollar General expects full-year earnings per share (EPS) of $5.50 to $5.90, which, at the midpoint, would be its lowest EPS since 2018 -- not good. That said, even with its current headwinds to profitability, the company still has ample breathing room to afford the dividend. In short, I don't believe it's in danger of being cut.
With a dividend yield now over 3%, Dollar General investors have never had better income potential, which is partly why it's caught my eye here.
DG Dividend Yield data by YCharts.
Now, if I were investing purely based on dividend yield, I wouldn't have bought more Dollar General stock -- there are other stocks with higher yields out there. But the yield is above average. And furthermore, Dollar General can do something that many other high-yield companies can't: grow earnings at a surprising pace.
Dollar General's sales are still up despite the drop in earnings. Therefore, the problem isn't consumer demand but rather operations. Management has identified and is working through the things that have dropped its profits to multiyear lows, and this is why I believe its earnings will rebound soon, giving it even more ability to grow the dividend long term.
Having added to my positions in Airbnb, Celsius, and Dollar General, my portfolio is now better aligned with my conviction for the long term.
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Jon Quast has positions in Airbnb, Celsius, and Dollar General. The Motley Fool has positions in and recommends Airbnb and Celsius. The Motley Fool has a disclosure policy.
