Don't Know What to Do With That Tax Refund? Consider These 3 Stocks

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It is tax season!

If those words cause excitement, and not dread, it probably means you are expecting a refund. 

A sudden cash windfall can be used in a lot of different ways, but as investors we are focused on stocks. Choose wisely and that refund can be a gift that keeps on giving, compounding over time.

For those wishing to invest a tax refund in the markets, or anyone on the lookout for good stocks to buy right now, here’s why three Fool contributors believe TransDigm Group (NYSE:TDG), General Motors (NYSE:GM), and Roblox (NYSE:RBLX) are stocks to consider with any windfall that comes your way.

Image source: Getty Images.

A long-term outperformer currently on sale

Lou Whiteman (TransDigm Group): TransDigm is largely in the business of making spare parts for airplanes and defense platforms. I realize that doesn’t sound like the most glamorous business to be in, but you can’t knock the results: TransDigm was one of the best-performing aerospace stocks of the last decade, up 1,084% from 2000 to 2009.

The pandemic took its toll. Airlines cut back on flights due to a lack of travel demand, and that meant falling demand for spare parts. But with travel now rebounding faster than airlines can get their debt-bruised balance sheets in order the carriers are going to be forced to rely on used equipment, and not new planes, a plus for TransDigm’s business.

Through its history, TransDigm has been an active acquirer of small businesses, using a private-equity-like model of buying up units, streamlining operations, and then letting those businesses operate semi-autonomously. Nearly 90% of net sales come from proprietary products, and about 75% come from products for which TransDigm is the sole supplier, giving the company substantial pricing power.

Despite the pandemic, TransDigm was able to generate earnings before interest, taxes, depreciation, and amortization (EBITDA) margins north of 40%, numbers that are almost unheard of in the manufacturing sector. With an aviation recovery now at hand, the company is well positioned to grow in 2021.

The company also has at least $2 billion in cash to put to work on acquisitions right now, or absent a deal could be returned to shareholders via a dividend.

Alas, so far this year the markets do not share my enthusiasm. TransDigm shares are off by about 4% year to date, perhaps a hangover after a sharp recovery in the second half of 2020. The recent underperformance looks like a rare opportunity to get in on a longtime winner with a great track record at an attractive valuation.

Here’s a great electric vehicle stock that will let you sleep at night

John Rosevear (General Motors): Why GM? Let’s start with this: A lot of high-flying electric vehicle stocks have come back to earth (at least somewhat) since the beginning of the year, but GM is up about 37% over that same period. 

I think that’s just the beginning. Here’s why:

  • GM is “all-in” on electric vehicles. Using its proprietary Ultium batteries and a new modular vehicle architecture, GM will launch a whole bunch of brand-new competitive battery-electric vehicles (BEVs) over the next few years. I know that lots of automakers are saying similar things, but here’s the big takeaway for auto investors: CEO Mary Barra has promised that GM’s new BEVs will deliver profits, something that has eluded most rivals.
  • Developing all that new technology has been expensive, and launching all those new electric models will also be expensive. But GM won’t have to mortgage the farm: Its revamped lineup of internal-combustion pickups and SUVs have been selling very well, and delivering strong margins. 
  • Self-driving? GM’s subsidiary Cruise appears to have that handled. A couple of weeks ago, Cruise revealed that it will launch a self-driving taxi service in Dubai in 2023. It hasn’t given a timeline for launching its service in the U.S., but we know that it plans to launch in San Francisco before it goes overseas. If you think robo-taxis are the future, GM is better positioned than just about any rival not named Waymo. (And yes, that includes Tesla, which is having some trouble with its Full Self-Driving at the moment.) 

The battery-electric Cadillac Lyriq, due next spring, is one of a long list of EVs coming from GM one the next three years. Image source: General Motors.

Here’s the real differentiator. GM is solidly profitable and trading at about 10.8 times its expected 2021 earnings, making it a bargain in the current market — and an absolute steal when compared to the likes of Tesla, which is trading at around 170 times expected 2021 earnings. 

Sure, GM is too big and too mature to ever be a 100-bagger. But I think it stands a great chance of outperforming the market by a nice margin over the next few years as all this profitable new technology hits the street. 

This company looks like Facebook in 2012

Rich Smith (Roblox): Let’s get one thing out of the way right off the bat. If you got (or get) a tax refund this year, the first thing you should do with that money is pay down your debts, and the next thing you should do is add to your rainy-day fund. No one should be investing in the stock market until those first two boxes have been ticked.

That being said, if you’ve got your debt situation under control, and if you’ve got a good cash cushion that you can draw upon in the event of a misadventure, and are willing to take a bit of risk with the remainder, then I’ve a hunch Roblox might be a good stock to buy.

I realize that’s a strange thing to say. Despite its $39.5 billion market capitalization, Roblox has reported no net profit for the past 12 months. It sells for a mind-boggling 43 times trailing sales, too, which seems really, really expensive. And yet, the more I look at the recent Roblox IPO, the more it reminds me of Facebook stock at its initial public offering back in 2012.

Like Facebook in 2012, Roblox’s revenue is growing by leaps and bounds, nearly tripling over the past couple of years. Like Facebook, Roblox is a free cash flow monster, transforming roughly 50% of every dollar it collects into pure cash profit. Indeed, with $420 million in FCF generated last year, Roblox stock even carries a valuation similar to Facebook’s in 2012. Roblox stock costs 94 times trailing free cash flow. Facebook IPO’d with a P/E ratio of about 105.

While I can’t say for certain that Roblox stock will rise tenfold in price in less than 10 years, as Facebook stock did, the similarities are striking enough that, despite valuation concerns, I ultimately decided to bite the bullet and invest in Roblox stock myself.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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