The S&P500 The index includes roughly 500 U.S. large-cap stocks and is often used as the primary benchmark for measuring the performance of the broader stock market. Over the past five years, the benchmark index has delivered a total return of 109%. Over the past ten years it has delivered a total return of 257%.
Investing in an exchange-traded fund (ETF) that tracks the S&P 500 index is a great, low-risk investment move, but there are also stocks that are part of the index that will deliver returns that crush the index average. With that in mind, read on to see why two Motley Fool contributors think buying these S&P 500 growth stocks and holding them for the next five years would be a great move.
Keith Noonan: With gains of around 22% this year, Amazon(NASDAQ: AMZN) shares slightly underperformed the S&P 500 index’s total return of 23%. But there are good reasons to think the tech giant will far outperform the benchmark index over the next five years.
For starters, Amazon’s business continues to look quite strong. While the stock isn’t beating the S&P 500 in 2024 trading at the time of writing, the company is posting encouraging results overall.
Amazon’s revenue rose 10% year over year to $148 billion in the second quarter, and operating income more than doubled year over year to $14.7 billion. Revenue from the company’s Amazon Web Services (AWS) cloud infrastructure business rose 19% year over year to $26.3 billion. Meanwhile, the company’s digital advertising business rose about 20% year over year to about $9.5 billion. The e-commerce-focused North American segment saw revenue increase 9% to $90 billion, and the similarly structured international segment saw revenue increase 7% to $31.7 billion.
Growth for the higher-margin AWS and digital advertising units, along with margin improvements in e-commerce, have helped Amazon achieve strong profit growth this year. Its e-commerce business still provides the bulk of Amazon’s total revenue, but it’s likely that cloud services and digital advertising will continue to make up a larger share of the overall sales picture. Increasing sales contributions from these higher-margin businesses should help the company’s combined margins rise.
But it would be a mistake to underestimate the relatively slow-growing, lower-margin e-commerce sector when it comes to assessing the return potential of Amazon stock over the next five years. While the potential of artificial intelligence (AI) as a sales driver for AWS has already been factored into many predictions, AI’s potential to have a transformative impact on the company’s online retail business still appears to be underappreciated.
With AI and robotics paving the way for greater automation of the company’s warehouse and delivery operations, some of the untapped profit potential of the tech giant’s massive e-commerce footprint could soon be unlocked. If these unfolding technology trends start to significantly reduce operating costs for the online retail industry, Amazon stock is poised to soar.
Jennifer Saibil:Home Depot(NYSE: HD) has almost always been a market-destroying stock. The price of the S&P 500 has nearly doubled over the past decade, and the longer you go back, the wider the gap becomes. The broader market’s profits have more than tripled in the past fifteen years.
If you need any proof of this company’s strength, despite major challenges, it’s still outperforming the market over the past year. These challenges are external and the market is recognizing that, as well as how well Home Depot is handling the situation.
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The real estate market is under severe pressure due to high mortgage rates, and consumers generally avoid large, expensive items due to inflation. Home Depot reported a small sales increase in its fiscal second quarter (ended July 28) due to a recent acquisition and new stores, but comparable sales fell 3.3%. The average ticket fell 2.2%, but big-ticket items (over $1,000) fell 5.8%, and major products like kitchen remodels had “softer engagement.”
Now that interest rates are starting to fall, the tide may be turning. Home Depot is the largest home improvement chain in the world, with more than 2,300 stores and robust digital channels. It’s still incredibly profitable despite the decline in comparable sales, and it’s generating growth where it can. The omnichannel component has become a key part of the business and digital sales increased 4% year-on-year in the second quarter, with half of orders picked up in stores.
It pulls several growth levers. It opens new stores, twelve of which are expected for the 2024 financial year, and invests in acquisitions and improved services, especially for the professional segment. It’s well positioned to grow again once the sector does, and there’s every reason to believe it can continue to crush the market over the next five years and beyond.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Amazon: If you had invested $1,000 when we doubled in 2010, you would have $21,154!*
Apple: If you had invested $1,000 when we doubled in 2008, you would have $43,777!*
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $406,992!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns October 21, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no positions in any of the stocks mentioned. Keith Noonan has no positions in the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Home Depot. The Motley Fool has a disclosure policy.
Prediction: These Two Beautiful S&P 500 Growth Stocks Will Crush the Market in the Next Five Years Originally published by The Motley Fool
