I don't know who said it first, but I'll say it again: Investors need to know what game they're playing. It's crucial.
I know all investors are trying to make money. But there are several different paths to get there. Consider investing great Warren Buffett, for example. His path follows his No. 1 rule: "Never lose money."
This is actually a different approach than The Motley Fool co-founder David Gardner. He calls his approach "losing to win." He's looking for investment ideas with much higher upside. He accepts that many of these stocks will lose money. But he holds on to his winners for the long haul, allowing them to compound and more than make up for the losers.
Don't get me wrong, I believe Buffett has earned the title of greatest investor of all time. But Gardner has been quite successful as well. And yet they're playing slightly different games. Buffett takes a more concentrated-portfolio approach, centered around stocks with high probabilities of positive returns. Gardner takes a more diversified-portfolio approach, centered around businesses with a lot of promise but still a lot to prove.
When it comes to Millennial and Gen Z investors, I believe many would improve their results by taking an honest look at their game plans. And a 2022 research report illustrates why I feel this way.
Regardless of the game, investors need this
According to a 2022 report from The Motley Fool, 40% of Millennial and Gen Z investors hold so-called meme stocks in their investment accounts.
There's no definitive definition of a meme stock. Think of it as investors using the power of the internet to rally other investors to a particular stock symbol. They hope their collective buying pressure will push the stock price up. It's worked at times. But normally the benefit is short-lived.
And that right there is the biggest problem with the meme-stock movement.
You see, Buffett and Gardner are playing different games but they're both winners because they still use the same strategy: They're both buy-and-hold long-term investors. This matters because compounding works its magic the longer the game is played.
In his bestselling book The Psychology of Money, author Morgan Housel expounded on this point when he wrote:
Good investing isn't necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can't be repeated. It's about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That's when compounding runs wild.
I'm not saying that investors can't make significant money in the short term with meme stocks. They can. But there's not a process they can consistently repeat to allow compound returns to work for them, the way that Buffett and Gardner do.
Three meme alternatives
I suspect that investors are attracted to meme stocks because they're usually consumer-facing businesses (well known) and they're hoping for high upside. For this reason, I've compiled three potential alternatives here that are also well-known businesses. And they have strong long-term upside potential. However, they're also financially sound companies, unlike a lot of meme stocks, which mitigates some of the downside risk.
1. Align Technology
The first company is Align Technology(NASDAQ: ALGN), maker of the well-known Invisalign braces. The company also has 3D mouth-scanning devices used by doctors to develop treatment plans. Overall, Align has a portfolio of nearly 1,700 patents, which has doubled in the last five years, to protect itself from competition.
Net revenue in 2023 for Align Technology has been slow-growing -- through the first three quarters, net revenue is up less than 3% from the comparable period of 2022. But it's not like teeth-straightening treatments are becoming obsolete. To the contrary, there's always new cohorts of kids and teens needing orthodontic attention. The business is simply in a slow period.
Align Technology remains profitable and has a debt-free balance sheet, meaning it's financially strong. And the stock is cheap right now at about four times its trailing sales -- that's close to its lowest valuation this decade, as the chart below shows.
ALGN PS Ratio data by YCharts
The market has tossed out Align Technology stock because of its slow growth. But a strong network of 252,000 doctors and a portfolio of proprietary products make me believe Align stock has long-term upside, especially at today's price.
2. Celsius
For investors who haven't yet seen beverages from Celsius(NASDAQ: CELH) at the store, just be patient because they could be in stock soon. The brand's popularity is soaring because consumers perceive these energy drinks to be better for you. And a distribution deal with PepsiCo in late 2022 sent its expansion into overdrive, which is why more investors could see these drinks on shelves in coming months.
Here's how much Pepsi's distribution has catalyzed Celsius' growth: This is the first full year of the partnership. And revenue for the first three quarters of 2023 is up 104% from the same period of 2022. To be clear, this isn't a high growth rate because the business is small. Year to date, the company has generated nearly $1 billion in revenue. Growth is just legitimately that good.
It could be tempting to think that Pepsi's distribution has already provided a boost to Celsius, with future benefits modest. However, it's possible that the company's growth is just getting started.
Consider that only 3.5% of Celsius' revenue in the third quarter of 2023 was derived from international markets -- Pepsi can help it grow overseas. Moreover, Pepsi is getting Celsius in the door at many restaurant chains, such as Jersey Mikes and Dunkin' Donuts. More restaurant chains could follow.
Celsius is firing on all cylinders and there are still plenty of untapped markets to give investors long-term upside.
3. Pinterest
Finally, with 482 million global monthly active users, image-browsing platform Pinterest(NYSE: PINS) is another well-known business. And like these other two companies, it's also in great financial shape with a debt-free balance sheet and $2.3 billion in cash, cash equivalents, and marketable securities.
Pinterest generates revenue by displaying ads, and a recent partnership with e-commerce giant Amazon could supercharge its growth and profits. The two companies are working together to display ads on Pinterest from Amazon's merchants. And the idea is that this can lead to better ad relevance and sales conversions.
The more effective Pinterest's ads are, the more demand there will likely be and rates can consequently increase as well. But the company's arrangement with Amazon is key for profits too. Rather than dedicate manpower toward hundreds of smaller merchants, Pinterest can deal directly with massive Amazon. This potentially lowers operating expenses while still providing that top-line boost.
I can't guarantee that these three stocks will go up. But Align, Celsius, and Pinterest all have similar attributes. They're well known, they're financially sound, and they still have growth opportunities. Using a framework like this, or something else, can lead to a repeatable process in finding investment ideas. And by sticking to a process for the long term, investors can let compounding work in their favor.
And compounding is what makes disparate investing game plans work.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jon Quast has positions in Pinterest. The Motley Fool has positions in and recommends Align Technology, Amazon, Celsius, and Pinterest. The Motley Fool has a disclosure policy.
