Laying a strong financial foundation early in life is crucial when choosing stocks for young investors. Taking advantage of the power of compounding allows even modest investments to grow significantly over extended periods. In other words, small, regular contributions can snowball into a significant nest egg over time. The historical performance of the S&P 500 index, averaging around a 10% annual return with dividends reinvested, exemplifies the wealth-creation potential of equities. Thus, the key is to invest wisely, choosing assets, especially robust stocks, with the potential for long-term growth.
However, sifting through many stocks and navigating the world of ETFs can feel overwhelming. This article simplifies some of the processes, especially for young readers. Today, we’ll explore three stocks for young investors to build wealth steadily in the years ahead.
Berkshire Hathaway (BRK-A, BRK-B)
Known for its unparalleled long-term track record, Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) is led by the legendary investor Warren Buffett. Investors eagerly follow Berkshire Hathaway’s annual shareholder meetings, where Buffett and colleagues share sage wisdom.
Over the past six decades, Berkshire Hathaway stock has appreciated at an impressive 20% compound annual growth rate, outperforming the S&P 500 by a wide margin. The power of compounding has resulted in remarkable returns for shareholders, making it a compelling choice among our stocks for young investors.
Berkshire focuses on acquiring high-quality companies with strong competitive advantages and strong balance sheets. Management released the fourth quarter and full 2023 results in late February. Net earnings came in at $17.36 per share compared with $8.24 for the same period 12 months ago. Moreover, full-year earnings per share (“EPS) for 2023 was $44.27 versus a loss of $10.33 for 2022. In addition to a jump in operating earnings, the company’s cash holding surged to record levels.
So far in 2024, BRK-B stock has advanced 16%, changing hands at 21.9 times forward earnings. Meanwhile, BRK-B’s 12-month median price forecast stands at $453.61, giving an upside potential of 9% from current levels. For young investors, owning a piece of Berkshire Hathaway can be a smart move toward building long-term wealth.
Shopify (SHOP)
Leading e-commerce platform provider Shopify (NYSE:SHOP) is next among our stocks for young investors. The company benefits significantly from the sustained shift towards online shopping worldwide.
Fourth quarter revenue grew 24% year-over-year (YOY) to $2.14 billion, translating to even stronger 30% growth after adjusting for the sales of its logistics businesses. Adjusted EPS also surged, reaching $0.34 compared to $0.07 in the prior-year quarter. Free cash flow more than quadrupled YOY as the company moved deeper into positive cash flow territory.
E-commerce is projected to continue strong growth in the coming years, while Shopify sits at the heart of this trend, providing merchants with an all-in-one platform. Given its expanding margins, loyal customer base and commitment to innovation, analysts forecast a 35% revenue growth in 2024.
Yet, SHOP stock has lost 4% year-to-date (YTD), offering a better entry point for new investors. However, we should note that shares still command a premium at 14x trailing sales. Meanwhile, Wall Street’s 12-month price target of $85.00 suggests a potential upside of around 14% from current levels. While Shopify’s stock price will likely be volatile the rest of the year, long-term investors could regard $70 as a better entry point.
SPDR S&P 500 ETF (SPY)
As one of the most actively traded ETFs globally, the SPDR S&P 500 ETF (NYSEARCA:SPY) is the final name on our list of stocks for young investors. The SPY fund tracks the performance of the benchmark S&P 500 index, which measures the stock performance of the largest publicly-traded 500 companies stateside that make up around 80% of the overall U.S. stock market’s value.
SPY offers broad exposure to these U.S. businesses’ growth and profitability potential, mitigating single-stock concentration risk. Due to its capitalization-weighted structure, large, well-established firms hold a substantial weighting within the index, influencing their overall performance.
Launched in 1993 as the first US-listed ETF, SPY holds over $530 billion in assets. The five largest names in SPY include Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), NVIDIA (NASDAQ:NVDA), Amazon (NASDAQ:AMZN) and Meta Platforms (NASDAQ:META), accounting for a quarter of the fund’s roster.
SPY has gained 8% YTD, while the fund’s top 10 holdings have significantly outperformed the broader market. Yet, the current valuation appears slightly expensive, with trailing price-to-earnings (P/E) and price-to-book (P/B) ratios of 22.0 and 4.5, respectively. A potential decline towards $500 or below during the upcoming earnings season would mean a more opportune entry point for long-term investors.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
