For those in a financial position to invest in them, this trio of stocks could help build long-term wealth.
April 15 is the infamous deadline for filing taxes in the U.S., and it is now (thankfully) behind us. But people are allowed to file well in advance of the deadline. Many did, and many of them have already received their tax refunds. And the IRS has some numbers for us.
According to an official press release on April 15, the IRS has already refunded $200 billion to taxpayers, for an average of $3,011 per filer.
People frequently use their refunds to cover big-ticket purchases, and many retail businesses run promotions to try to capture those dollars. But for those in an accommodating financial position, a smart move would be to invest that tax refund.
For those looking to grow their wealth in this way, The Lovesac Company (LOVE 0.84%), Five Below (FIVE -0.07%), and PepsiCo (PEP 1.65%) are three no-brainer buys today.
1. The Lovesac Company
Lovesac is a brilliantly designed furniture business, in my opinion. It has an incredibly simple portfolio of just two product lines: beanbag chairs and sectional couches. It can charge premium prices because its products are high-quality and have lifetime guarantees. Its designs don’t change. But its products can be modified over time with accessories and additions, providing ongoing revenue opportunities.
Allow me to expound on why Lovesac’s design is brilliant. First, offering high-quality merchandise is a good way to build a happy customer base. Second, keeping product offerings at a minimum streamlines operations. And third, because it does not change the designs of its products, old inventory doesn’t become obsolete. In other words, it doesn’t matter how fast its products sell, it can still charge full price for them.
There’s more that could be said. But all of these things have allowed Lovesac to build brand loyalty and command healthy profit margins, which makes it a good investment.
I believe Lovesac stock qualifies as a no-brainer stock buy because shares are just so cheap. As of this writing, they trade at a price-to-earnings (P/E) ratio of only 13. For perspective, the average valuation of the S&P 500 is almost double this.
2. Five Below
Trading at a P/E of almost 28, Five Below has a valuation more than twice that of Lovesac. But the discount retailer is a no-brainer buy nonetheless because of the compelling economics of its stores and management’s head-turning expansion plans.
Regarding the economics of the business, Five Below’s stores have a payback period of less than one year. Here’s what this looks like in financial terms: From 2020 through 2022, it cost the company $390,000 on average to open a new store. But on average, those stores earned $475,000 in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in their first year.
In short, the annual adjusted profits from a Five Below store exceed the cost of opening one. This not only means that the company can fund its growth without going into debt, but that it’s becoming more profitable with growth.
Five Below had 1,544 locations on Feb. 3, the end of its fiscal 2023. But it is marching toward operating 3,500 locations by 2030. Assuming the business economics continue on their current trajectory, Five Below will be a cash-flow machine several years from now, making today a good time for investors to buy shares.
3. PepsiCo
Don’t misunderstand: I believe both Lovesac and Five Below will do well in the coming years. But Pepsi stock is as no-brainer an investment as they come because I’m confident its business will thrive for the foreseeable future. Its competitive advantages are simply too big for it not to succeed.
Brand recognition and loyalty are huge advantages for Pepsi. The company owns more well-known consumer brands than I can list here. This gives it consumer mindshare, which is important. Additionally, Pepsi has products in multiple categories. If, for example, there’s a pullback in sales of carbonated beverages, Pepsi’s downside would be mitigated because it owns snack and food brands as well.
Pepsi also has advantages of scale. But some of its product lines are still scaling in international markets, which gives it opportunities for growth. The company’s operating profit grew substantially in each of its international markets in 2023, and some of those increases were substantial. For example, its operating profit in Latin America rose 38% to nearly $2.3 billion.
Pepsi’s management attributed the higher profits to bigger scale in those markets. This suggests its profits can keep going higher as it adds more scale. That’s good news for dividend investors hoping for more payout increases from this Dividend King.
How to invest a refund
If I were using the average tax refund of $3,011 to buy these three stocks, I would probably put 50% in Pepsi, 25% in Lovesac, and 25% in Five Below. This is because I believe the downside risk is lowest with Pepsi.
As of this writing, that works out to about nine shares of Pepsi, 40 shares of Lovesac, and five shares of Five Below.
Of course, Lovesac, Five Below, and Pepsi aren’t the only good stocks to buy now — other top ideas exist. And investors don’t have to divvy up their tax refund as I’ve laid out here. This is just one example of how people could use their tax refunds to build long-term wealth.
