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All Contents © 2017The Kiplinger Washington Editors
By Vince Martin
| October 2017
Long-term investing seems more difficult now than it has ever been, and finding stocks to buy and hold for years seems like a tough task.
Consumer tastes are moving away from dominant brands towards unique, smaller offerings. Commodity prices remain volatile, with both oil and gold well off peaks from earlier in the decade.
The increasing importance of technology stocks in the broad market adds a layer of complexity, and the increasing pace of technological chance makes forecasting even more difficult than it normally is.
While lower fees have pushed some individual investors into index funds, there’s little doubt that the complexity of today’s markets has been a factor as well. Traditional buy-and-hold investing simply is more difficult in a world that seems to be moving much faster. Would any investor have guessed even five years ago that shares of a retail giant like Macy’s Inc. (M) would lose 70% of their value? Or that dozens of oil drillers would go bankrupt amid the U.S. shale revolution? Or that General Electric Company (GE) would become one of the least-loved stocks in the market?
Buy and hold does seem a tougher path these days. But it’s not impossible. These 10 best stocks to buy and hold should stand the test of time, or at least the next decade. Providing a combination of income and (hopefully) share appreciation, these stocks should provide above-market returns for any investor, in any environment.
Prices and data are from the original InvestorPlace story published on October 10, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Pettersjan via Wikimedia
Ten years simply isn’t a long time for Diageo plc (DEO). The owner and distributor of alcoholic beverages worldwide has a number of products in its portfolio that are aged longer than that, most notably in its flagship Johnnie Walker line. Diageo also owns Captain Morgan rum, Tanqueray gin, Smirnoff vodka and Guinness beer, among many others.
There are some concerns about increasing competition from smaller brewers and distilleries, but Diageo’s portfolio is diversified enough to weather potential issues in specific markets. And so many of its major brands have decades, if not centuries, of brand equity that upstart rivals simply will not be able to erode. There’s still substantial room for growth in emerging markets, with Johnnie Walker in particular likely to benefit from the growing middle and upper class populations in India.
Add to that the fact that alcohol sales typically withstand overall economic weakness, and DEO stock looks downright cheap. At under 20 times 2018 analyst earnings-per-share estimates, Diageo stock trades at a notable discount to other defensive consumer stocks. The Coca-Cola Co. (KO), for instance, trades at 23 times forward EPS. Diageo appears safer, less challenged by political concerns, and with a 3% dividend, offers nearly as much income as KO. The combination makes Diageo a smart holding for the long-term.
Mike Mozart via Flickr
Buying any retailer with plans to own it for a decade or longer seems somewhat foolish in this environment. Even retail sectors supposedly immune to the e-commerce threat, like auto parts, have seen pressures increase.
But Dollar General Corp. (DG) might be the exception to the rule. The dollar store space, including DG rival Dollar Tree, Inc. (DLTR), has seen growth slow somewhat of late. Notably, the channel’s gains against retail giant Wal-Mart Stores Inc (WMT) appear to have reversed, as WMT has improved its operations over the past few quarters.
But dollar stores still offer value to consumers, while low price points offset potential e-commerce pressure. (It’s still impossible for anyone to make money shipping a $3 or $5 item.) Dollar General earnings still are growing, yet the stock looks cheap, trading at under 16 times next year’s estimated EPS. Brick-and-mortar retail may be pressured, but it’s not going to wither away for good.
DG seems likely to be one of the survivors, yet it isn’t quite priced as such.
From one standpoint, Amazon.com, Inc. (AMZN) might seem an odd choice for this list. Most investors would agree that Amazon will at least be around ten years from now. But I imagine many are skeptical that a stock with a forward P/E of 125 won’t come back to Earth at some point.
But I continue to believe that it is short-sighted to assume AMZN stock is overvalued purely based on its P/E ratio. And from a qualitative standpoint, I’d add that no company of its size is better-positioned for growth over the next decade than Amazon.
Valuation aside, it’s fascinating to think where Amazon could be a decade for now. Amazon Web Services already is the preeminent cloud provider, well ahead of tech titans like Microsoft Corporation (MSFT) and Oracle Corporation (ORCL). The acquisition of Whole Foods Market will jumpstart the company’s brick-and-mortar ambitions. And the company very well may have a delivery network that rivals FedEx Corporation (FDX) and United Parcel Service, Inc. (UPS).
Regardless of its current valuation, Amazon likely is going to dominate the next decade, both in the U.S. and worldwide. And that makes the stock a buy and hold, particularly since its earnings power is much greater than headline numbers suggest.
Investors would be forgiven for wanting to avoid the pharmaceutical industry altogether. Political and regulatory risks abound, drugmakers have faced significant criticism about pricing practices over the past few years, leading to arguments in some quarters for price caps or importation of overseas products that could pressure margins.
But Pfizer Inc. (PFE) likely is worth the risk. The world’s second-largest drugmaker, behind Novartis AG (NVS), isn’t growing the way it once did. But it is still growing, with EPS expected to increase roughly 7% this year and 8% in 2018.
But PFE stock isn’t really priced for any growth, with a forward P/E multiple of 13 and a 3.5% dividend yield. And that seems just too conservative. Pfizer isn’t going to be an explosive stock, but expecting 8-10% share price growth and a nice dividend doesn’t seem terribly outlandish at current prices. With a broad and diversified portfolio providing some downside protection, PFE’s upside potential is worth dealing with potential political risk.
Investors might not be familiar with Lamb Weston Holdings Inc (LW). The company was spun off by Conagra Brands Inc. (CAG) almost a year ago, and LW stock has gained nicely since then.
However, most investors know one of the company’s key products: the McDonald’s Corporation (MCD) French fry. McDonald’s accounts for 11% of the company’s sales, and other fast-food chains provide a substantial amount of sales as well.
Lamb Weston’s frozen potato products also are sold to smaller chains, independent restaurants, and overseas customers, along with a smaller presence at retail. Growth has been steady, margins continue to expand, and those international customers offer growth opportunities as French fry demand increases beyond the U.S.
LW stock isn’t necessarily cheap, but relative to other food producers it’s not terribly expensive. But with limited exposure to pricing pressure and deflation in supermarkets, the stock should trade at a premium. A 1.5% dividend adds income, and a sub-$50 price still looks cheap. As long as consumers eat French fries, LW stock should continue to rise. And one imagines that French fry demand isn’t going to decline any time soon, whether at McDonald’s or anywhere else.
Courtesy VF Corporation
When looking for brands that will stand the test of time, look no further than VF Corp (VFC).
VFC produces apparel under well-known brands like Wrangler, The North Face, Timberland and Eastpak. The company also manufactures licensed products for major sports leagues and Harley-Davidson Inc (HOG).
VFC shares have risen sharply of late, climbing 15% just since mid-July. But there’s more room for the stock to gain. VFC trades at just 19 times 2018 EPS estimates, despite analysts projecting a double-digit increase in profits after a modest pullback this year. With demand for jeans and outdoor apparel, in particular, unlikely to fade any time soon, VFC should be able to drive sales increases and margin expansion for some time going forward. And a 2.6% dividend yield adds to the bull case.
Consumer tastes can be fickle, but VF Corporation brands have managed those tastes for decades. I fully expect they’ll do the same for the next decade as well.
Diversified chemicals maker Celanese Corporation (CE) will celebrate its 100th anniversary next year. And the company looks in good shape for the next century as well.
CE products have a role in products across industries worldwide. Celanese’s specialty polymers are used in automotive, medical and industrial applications. Sweetener Sunett is used in beverages and dairy products. And industrial products are used in paints, coatings and adhesives.
The diversified nature of the product portfolio and the consumer base leads to stable, and solid growth. CE stock has gained sharply of late, rising 63% over the past year. But the stock still looks reasonably cheap, trading at around 15 times 2017 EPS guidance.
With those earnings growing double-digits, there’s room for both the multiple to expand and profits to grow. That should drive CE stock higher for years to come.
Utilities typically are relatively safe, long-term investments, offering dividend income but little in the way of substantial price movements. Historically, Sempra Energy (SRE) has fit that bill, but right now the stock has a bit more spice than most utilities.
For one, SRE has operations in Chile and Peru, two of the most stable and fastest-growing markets in South America. Meanwhile, its U.S. operations in San Diego serve a growing market with some of the highest income and real estate prices in the country.
SRE stock has pulled back of late, after the company outbid Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) for Oncor Energy. Sempra has issued shares to help fund the acquisition and it has added debt as well. Investors clearly saw the acquisition as adding some risk to the stock, which may be true.
Still, the pullback looks like a buying opportunity. SRE remains a intriguing S&P 500 utility with a diversified portfolio and organic and inorganic growth opportunities. A forward multiple of 20 looks a bit high for the space, but will narrow as Oncor contributes to profits. And a nearly 3% dividend allows investors to “get paid to wait,” as the saying goes. Sempra might not be the typical utility, but in this case, that’s a good thing.
I’ve recommended McCormick & Company, Incorporated (MKC) in this space before, and MKC stock remains one of my largest holdings — one I intend to keep for the long-term.
McCormick stock isn’t cheap, but it rarely is. The spices and seasonings category continues to grow, as younger consumers actually use more of the product than their parents. The company’s acquisition of brands from Reckitt Benckiser Group PLC (RBGLY) will pay dividends beginning next year, and McCormick’s global reach should accelerate growth of Frank’s RedHot hot sauce and French’s mustard for years to come.
With MKC stock back under $100 after some choppy trading, the price looks reasonable relative to the long-term opportunity here. Category growth, international expansion and strong management offer more than enough at current levels.
Stepan Company (SCL) is another relatively unknown stock, and another long-term buying opportunity. Stepan makes ingredients for cleaning products, detergents and shampoos, along with lubricants and foam used for insulation by construction companies.
It’s not a particularly sexy portfolio, but it’s been enough to drive solid revenue and profit growth for years now, as well as exceptional performance in SCL stock. There’s not a lot of reason to see that changing any time soon, and a forward P/E multiple of 16 leaves SCL looking reasonably priced, if not outright cheap relative to its growth prospects.
Stepan’s dividend does yield less than 1%, but there’s room for improvement on that front. Even with such a small payout, there’s reason enough to see SCL continuing to drive shareholder returns, as earnings grow and investors come around to the story here.
This article is from Vince Martin of InvestorPlace. As of this writing, he was long MKC.
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