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Don't Waste Your Money on Penny Stocks; These 3 Stocks Are Better Buys

The prevailing wisdom in investing seems to be "buy low, sell high." This is easy to say but very tough to do. The problem is that investors tend to gravitate toward cheap stocks to "buy low," not realizing that buying cheap stocks is not the solution for their investment portfolio woes. Many end up scouring the bargain bin for penny stocks that they believe may suddenly shoot up, multiplying their wealth many times over.

The danger with this sort of thinking is that you may end up with a bunch of lemons that are cheap for a very justifiable reason. Penny stocks are so named for a good reason. Some may have fallen on tough times and are unable to recover their former glory, while others could just wallow in mediocrity for years to come, lacking the spark that can take the business to a higher level.

These are the reasons you should be willing to pay up for great companies. While some may not be cheap using traditional metrics, their long runway for growth and dominant market position still makes them way more attractive than the penny stocks. Here are three that I believe can provide you with more bang for your buck.

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Image source: Getty Images.

Apple

Apple (NASDAQ: AAPL) is the most successful smartphone and app services company in the world, with a market value of $1.6 trillion and rising. Apple has tripled in value over the last five years and trades at around 30 times historical earnings. Its iconic iPhone continues to attract legions of fans with its sleek design and innovative features, and every new annual iteration is hotly anticipated.

Apple has built up a strong ecosystem of developers and users with its app store, and this network effect is making its competitive moat even stronger. For its second-quarter fiscal 2020 earnings, the company reported an all-time high revenue for its services division and a quarterly high for its wearables division. The services segment, which consists of offerings such as Apple TV and Apple Pay, now make up almost 23% of total revenue and was up 16.6% year over year.

Although Apple has had to re-close a portion of its stores due to a feared second coronavirus wave, I believe that services and wearables can continue to grow and do well after the crisis passes. This belief is supported by Apple's innovative culture and continuous improvements to its product and service offerings.

Visa

Visa (NYSE: V) is one of the largest financial services companies in the world. Visa's shares have more than doubled over the last five years as the company continues to expand globally. For its fiscal second-quarter earnings, Visa reported a steady 7% year-over-year growth in net revenue and a 4% year over year growth in net income. Payments volume grew 3% year over year in nominal terms, and as at the end of the previous quarter, Visa had close to 3.5 billion cards issued. 

The COVID-19 pandemic has accelerated the shift toward online digital payments, providing a long-term growth tailwind for Visa. CEO Alfred Kelly reiterated on the company's earnings conference call that three primary growth levers -- consumer payments, new flows, and value-added services -- remain intact. The company sealed deals with banks such as Barclays in the U.K. and Truist in the U.S., and expanded partnerships with existing clients.

Visa is also working on digitizing cross-border peer-to-peer transactions and entered into an agreement for business-to-business virtual cards with ICBC, the largest bank in China. These growth initiatives and expanded value-added service offerings demonstrate the company's commitment to growing despite the pandemic, and investors can look forward to better financial numbers ahead.

Facebook

Facebook (NASDAQ: FB) is the world's largest social media company and owns brands such as Facebook, Instagram, and WhatsApp to help people connect. The company has been steadily increasing its user base, with daily active users increasing from 1.4 billion in the first quarter of 2018 to 1.7 billion in 2020's first quarter. Monthly active users also saw a rise -- from 2.2 billion to 2.6 billion -- over the same period.

Facebook's earnings continue to impress, with an 18% year-over-year rise in total revenue and net income doubling in Q1. Although the social media giant is currently grappling with a public outcry and a growing advertiser boycott due to its perceived mishandling of hate speech, I believe this is just a temporary challenge and that, over time, the advertisers will come streaming back once the company makes appropriate concessions.
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10 stocks we like better than Apple
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Royston Yang owns shares of Apple, Facebook, and Visa. The Motley Fool owns shares of and recommends Apple, Facebook, and Visa. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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