Coca-Cola, Amazon, and Nu Holdings are promising long-term investments.
It might seem tough to get started in the stock market with just $3,000, especially when many popular stocks cost hundreds or thousands of dollars per share. But there's no rule that requires investors to buy a round lot of 100 shares, while most brokerages now make it easier to invest in higher-valued stocks with fractional trades.
So instead of thinking $3,000 isn't enough to build a diversified portfolio, smaller retail investors should simply crack open Warren Buffett's investment portfolio at Berkshire Hathaway to find some good starter stocks. So today, let's review Coca-Cola (KO 0.17%), Amazon (AMZN -0.08%), and Nu Holdings (NU 5.27%) -- which are reliable defensive, growth, and emerging market plays, respectively, for building a well-diversified portfolio.
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1. The defensive play: Coca-Cola
Coca-Cola has been one of Berkshire Hathaway's top investments since 1988 and still accounts for 7.1% of its portfolio. It's a solid long-term investment for three reasons: It's one of the world's largest beverage companies, it thrives through economic downturns, and it's raised its payout annually for 62 consecutive years.
Coca-Cola might seem like a risky stock to own as soda consumption rates decline, but the company constantly expands its portfolio with more brands of bottled water, teas, juices, sports drinks, energy drinks, coffee, and even alcoholic beverages to offset that pressure. The company also refreshes its sodas with smaller serving sizes, new flavors and versions to attract new consumers.
For 2024, Coca-Cola expects its organic revenue to rise 9% to 10% as its comparable earnings per share (EPS) grows 5% to 6%. The stock still looks reasonably valued at 24 times forward earnings, and pays an attractive forward dividend yield of 2.8%.
So if you invest $3,000 in Coca-Cola today, you can earn about $84 in annual dividends as you ride out the near-term macro headwinds. If you had invested $3,000 in Coca-Cola with Warren Buffett at the start of 1988 and reinvested your dividends, your stake would be worth $206,400 today and paying out $5,780 in annual dividends. Past performance never guarantees future returns, but Coca-Cola is still one of the few blue-chip stalwarts that I'd consider a "forever" stock.
2. The growth play: Amazon
Berkshire Hathaway started to buy shares of Amazon, the world's largest e-commerce and cloud platform company, in 2019. Amazon now accounts for 0.4% of Berkshire's portfolio.
The company's cloud platform, Amazon Web Services (AWS), operates at much higher margins than its e-commerce business. That allows it to subsidize the expansion of its lower-margin retail marketplaces with its higher-margin cloud revenues. That flywheel helps Amazon lock in its online shoppers with steep discounts, loss-leading strategies, and other perks for its Prime members. It also consistently widens its moat against other brick-and-mortar and online retailers.
Amazon's stock recently tumbled after its second-quarter revenue missed analysts' estimates and management provided soft guidance for the third quarter. That slowdown was mainly caused by macro and competitive headwinds for its e-commerce business.
On the bright side, AWS' growth accelerated over the past year as more companies expanded their cloud infrastructure to run new generative AI services. That growth engine should offset the softness of Amazon's retail business in this tougher macro environment, so analysts still expect its revenue and earnings to rise 11% and 58%, respectively, this year. The stock isn't cheap at 36 times forward earnings, but it's still a great long-term play on the expanding e-commerce and cloud markets.
3. The emerging markets play: Nu Holdings
Nu Holdings, which operates in Brazil, Mexico, and Colombia, owns one of the largest online banks in Latin America. It nearly doubled in size from 53.9 million customers at the end of 2021 to more than 100 million customers today. Its online-only strategy helped it expand a lot faster than brick-and-mortar competitors, and it locks in its customers with a wide range of financial services. Berkshire Hathaway invested in Nu's IPO in 2021, and the stock currently accounts for 0.3% of its portfolio.
In constant currency terms, Nu's revenue soared 168% in 2022 and 63% in 2023. Over the past year, its monthly average revenue per active customer grew as its average costs of serving each customer declined.
Gross margins also held steady as the company's net interest margins expanded. In other words, Nu's hypergrowth rates seem sustainable -- and it should maintain that momentum as it expands beyond those three core markets and locks in more unbanked and underbanked customers across Latin America.
Analysts expect Nu's revenue and adjusted EPS to rise 45% and 64%, respectively, in USD terms in 2024. Those are stellar growth rates for a stock that trades at just 25 times forward earnings, but its valuations are being squeezed by concerns about inflation and other macro headwinds. If Nu continues to expand and the macro environment warms up, the stock could easily command a higher valuation and generate multibagger returns from a modest $3,000 investment over the next few years.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
