Looking for stocks with the potential to disrupt the market? These two companies look poised to be big winners.
The S&P 500 index includes approximately 500 large-capitalization U.S. stocks and is often used as an important benchmark for measuring overall stock market performance. Over the past five years, the benchmark index has delivered a total return of 109%. The total return over the past 10 years is 257%.
Investing in exchange-traded funds (ETFs) that track the S&P 500 index is a good, low-risk investment, but some of the stocks that are part of the index may generate returns that exceed the index average. there is. With that in mind, let’s take a look at why two Motley Fool contributors think buying and holding these S&P 500 growth stocks for the next five years is a great move.
This tech giant still has room to run
Keith Noonan: Amazon (AMZN 0.78%) stock is up about 22% this year, slightly less than the S&P 500’s total return of 23%. But there’s good reason to think the tech giants will significantly outperform their benchmark indexes over the next five years.
First of all, Amazon’s business continues to look very strong. As of this writing, the stock has not outperformed the S&P 500 in trading in 2024, but the business has generally delivered promising results.
Amazon’s sales in the second quarter reached $148 billion, a 10% increase from the same period last year, and operating profit more than doubled from the same period last year to $14.7 billion. Sales of the company’s Amazon Web Services (AWS) cloud infrastructure business reached $26.3 billion, an increase of 19% year-on-year. Meanwhile, the company’s digital advertising business reached approximately $9.5 billion, an increase of approximately 20% from the previous year. Sales in the e-commerce-focused North America division rose 9% to $90 billion, while sales in the similarly structured International division rose 7% to $31.7 billion.
Amazon posted strong profit growth this year, driven by growth in its high-margin AWS and digital advertising divisions and improved margins in e-commerce. The company’s e-commerce business still accounts for the majority of Amazon’s overall revenue, but cloud services and digital advertising are likely to continue to account for a larger portion of overall sales. Increasing sales contribution from these high-margin businesses should be able to boost the company’s total profit margin.
But when evaluating Amazon stock’s earnings potential over the next five years, it would be a mistake to underestimate its relatively slow-growing, low-margin e-commerce business. The potential for artificial intelligence (AI) to be a revenue driver for AWS is already factored into many forecasts, but the potential for AI to have a transformative impact on the company’s online retail business still appears to be underappreciated. is.
AI and robotics are paving the way for greater automation of the company’s warehouse and distribution operations, and some of the untapped profit potential of the tech giant’s vast e-commerce influence could soon begin to be unlocked. there is. If these technological advancements begin to significantly reduce the operating costs of online retail businesses, Amazon’s stock price will soar.
This retail leader could continue crushing the market
Jennifer Cybil: Home Depot (HD -0.94%) has been a market-disrupting stock for almost forever. It has nearly doubled the return of the S&P 500 over the past 10 years, and the gap widens the further you go back, growing to more than triple the return of the entire market over the past 15 years.
If you need proof of this company’s strength, it’s that despite significant challenges, it has still outperformed the market over the past year. These challenges are external and the market recognizes that as well as how well Home Depot is handling this situation.
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The real estate market is under severe pressure due to high mortgage rates and shoppers are generally avoiding large and expensive items due to inflation. Home Depot reported a slight sales increase in its fiscal second quarter (ending July 28) due to recent acquisitions and new stores, but comparable sales declined 3.3%. Average tickets were down 2.2%, but big-ticket items (over $1,000) were down 5.8%, and large items like kitchen remodeling saw “slower engagement.”
With interest rates starting to fall, the tide could start to turn. Home Depot is the world’s largest home improvement chain with more than 2,300 stores and a powerful digital channel. Despite similar sales declines, the company is still making impressive profits and generating growth wherever possible. Omnichannel elements have become a key part of the company’s business, with digital sales up 4% year over year in the second quarter, with half of orders picked up in stores.
It’s pulling some growth levers. The company is opening new stores, with 12 expected to open in fiscal 2024, and is investing in acquisitions and improving its services, especially for professionals. The company is well-positioned to quickly return to a growth trajectory similar to its industry, and there’s good reason to believe it could continue to dominate the market over the next five years and beyond.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Jennifer Cybill has no position in any stocks mentioned. Keith Noonan has no position in any stocks mentioned. The Motley Fool has positions in and recommends Amazon and Home Depot. The Motley Fool has a disclosure policy.
