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All Contents © 2017The Kiplinger Washington Editors
By Charles Sizemore
| May 2017
Most investors wouldn’t put the words “growth stocks” in the same sentence as “retirement,” except perhaps as a precautionary warning against what not to buy.
At face value, this makes sense. Growth picks often end up being fad or glamour stocks and often trade at wildly optimistic valuations. When growth slows down or when expectations fail to live up to the hype, growth stocks can take a serious tumble.
That’s a problem if you’re having to regularly sell stocks to take withdrawals from your account. Just look at recent flame-outs like Snap Inc. (SNAP) and Yelp Inc. (YELP). If your retirement hinges on selling these stocks to a greater fool … well, you might be going back to work.
Understandably, most retirees tend to opt for the stability of slow-growth dividend payers. But this too can be a mistake if it overweights you in sectors like utilities or telecom, both of which have limited upside and face a very real threat of technological disruption.
Making it worse, many of the traditional go-to dividend value plays are far from cheap these days. Tobacco giants Altria Group Inc. (MO) and Reynolds American, Inc. (RAI) trade for 20 and 24 times forward earnings, respectively.
You may be living in retirement for 30 years or more, so at least a modest portion of your portfolio should be allocated to growth stocks.
You’re never going to find growth stocks that are truly “future-proof.” Those simply don’t exist. But today, we’re going to look at 10 growth stocks that should be solid contenders for a growth portfolio. It’s entirely possible that not a single one of these will still be around by the time your 100th birthday comes around, but all should be very solid growth engines for many years to come.
Prices and data are from the original InvestorPlace story published on May 16, 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.
Kārlis Dambrāns via Flickr
Global payment network Visa Inc. (V) sits at the intersection of two of the most powerful trends in the world today: the rise of internet commerce and the rise of the emerging-market consumer.
The first point is easy enough to understand. Amazon.com, Inc. (AMZN) and its online brethren are turning the traditional world of retail upside down, and online purchases require online payments. Visa faces competition here from PayPal Holdings Inc. (PYPL), Apple Inc. (AAPL) and countless other upstarts. But a rising tide lifts all boats, and Visa has name recognition and acceptance rates that none of its competitors can rival.
Meanwhile, most emerging-market economies are still largely cash-based, particularly when you get outside of the wealthier parts of the major cities. As the emerging world modernizes, Visa will grow right along with it.
Visa trades at 23 times next year’s expected earnings, so it’s by no means a cheap stock. But given its growth prospects, I don’t consider it overpriced.
Johannes Marliem via Flickr
Microsoft Corporation (MSFT) is a testament both to the resiliency of economic moats and to the difference a visionary CEO can make.
Former CEO Steve Ballmer was an unmitigated disaster. Under his watch, Microsoft was leapfrogged in mobile by both Apple and Alphabet Inc. (GOOGL). MSFT belatedly dumped a ton of money into struggling handset maker Nokia, only to eventually give up and take an $8 billion loss. Meanwhile, PC sales went into long decline, which crimped sales of the Windows operating system.
I won’t even get into the debacle that was Windows 8.
Yet through it all, the company continued to grow, and revenues have nearly doubled over the past decade.
Then Satya Nadella came along as Ballmer’s replacement, threw Ballmer’s legacy out the window (pun intended) and redesigned Microsoft as a cloud services company that competes head-to-head with Amazon Web Services. Under Nadella’s visionary leadership, Microsoft is now positioned to compete for another generation.
Personal and corporate computing needs have massively changed over the past 30 years, and MSFT has managed to stay relevant. That’s a growth stock you want to own in a retirement portfolio.
Robert Scobie via Flickr
Along the same lines, I’d mention Microsoft’s rival, Alphabet Inc. (GOOGL).
Although Alphabet has only been in business for less than 20 years, it has already faced multiple competitive challenges and managed to come out stronger every time, making it one of the best growth stocks of the past couple decades.
First it was mobile. As more computing and internet searches moved to smartphones, many analysts worried that Alphabet’s lucrative Google desktop homepage would lose eyeballs to less profitable mobile searches. Well, Alphabet quickly cast those worries aside, proving that mobile could be every bit as valuable to advertisers.
Next came the threat from social media. With Facebook Inc. (FB) emerging as a go-to portal, a lot of investors worried that Google would simply be bypassed altogether. Well, that seems almost silly now. While Facebook is indeed taking a large chunk of online advertising dollars, Alphabet is the undisputed champion, taking in about 40% of all American online ad spending.
Alphabet trades for about 24 times expected earnings, which isn’t cheap in a strict sense. But for one of the world’s greatest growth engines, it’s not exceptionally pricey, either.
I’ll admit, Facebook Inc. (FB) might be a risky long-term bet. Social media is still new, and it’s hard to imagine what an industry that barely existed a decade ago will look like 20 or 30 years from now.
Founder Mark Zuckerberg has been compared to a young Bill Gates, both for his vision and for his ruthlessness. But Gates’ primary businesses — the Windows operating system and Office productivity suite — had much deeper competitive moats at this stage of the game for Microsoft. Gates enjoyed virtual monopoly power during the PC’s days of dominance, and switching costs were prohibitively high for most computer users.
Social media is more prone to disruption, as can be seen with the swiftness with which Facebook buried social-media pioneer MySpace, and the tenacity with which it’s going after Snap. That said, Zuckerberg is not the type to sit idly by while the world around him changes. FB has been very aggressive in adding new features to its core site to keep users engaged and even more aggressive in seeking out new opportunities, such as Instagram and WhatsApp.
And Facebook’s network effects (i.e., the pressure to and need to join if all of your friends and family are on it) are a competitive moat that gets a little deeper each day.
If you’re looking for long-term growth, Facebook would seem to be a very decent bet.
Amazon.com, Inc. (AMZN) isn’t cheap. The stock trades for 181 times earnings, for crying out loud. But over the past decade, its revenues have growth by more than a factor of 10.
AMZN is one of the greatest growth stories in the history of American capitalism, and it’s not finished yet. Not even close.
Amazon is the most important force in retail today. While its revenues are still a fraction of those of Wal-Mart Stores Inc. (WMT), Amazon has upended the entire retail industry, and virtually every retailer out there is scrambling to keep up.
That’s not Amazon’s only vehicle for growth. Its AWS is taking a wrecking ball to International Business Machines Corp.’s (IBM) traditional software and services business. Amazon is also a leader in implementing aerial drones for delivery, and its distribution centers are a wonder of automation technology. And frankly, who knows what other ideas CEO Jeff Bezos has in that brilliant mind of his.
At some point, Amazon’s growth will markedly slow down. It happens to every company eventually. But there is a lot of money to be made between now and then.
Mike Mozart Via Flickr
It may seem ironic that I’m recommending United Parcel Service, Inc. (UPS) immediately after Amazon.com, given that Amazon is busily building out a logistical network to reduce its dependence on UPS and other delivery services.
But remember, as potent a force as Amazon is, it’s by no means the only name in online retail. And as internet commerce continues to become a bigger and bigger piece of total retail spending, UPS has the wind at its sails.
UPS’ revenues per share have grown by about 55% since 2009, and apart from a single down year during the Great Recession, the company has seen its revenues grow every year for the past 15 years.
Aerial drones, ride-sharing companies like Uber and other non-traditional forms of transportation are emerging as potential competitive threats to UPS. But UPS has precious few competitors when it comes to longer-haul delivery.
UPS is a solid option as a retirement growth stock, and it pays a 3.2% dividend to boot.
It might seem odd to include Berkshire Hathaway Inc. (BRK.B) — which is run by legendary value investor Warren Buffett — on a list of growth stocks. But in looking at the company’s returns, it only makes sense.
From 1964 to 2016, Berkshire Hathaway’s book value was up an eye-popping 884,319% and its market value 1,972,595%. To put that in perspective, the S&P 500 is up about 12,717% over the same period.
Buffett has also never paid a dividend, believing that the cash would be better spent on new investment opportunities by Buffett himself. In retrospect, it’s hard to argue with him.
Despite its stodgy, conservative reputation, Berkshire Hathaway is very much a growth stock. Unfortunately, Mr. Buffett won’t be with us forever. I don’t believe the Oracle will ever hang up his hat. He’s far more likely to die with his boots on, doing what he does best until the very end. But the man is also 86 years old, so we have to ponder life after Buffett.
Buffett has built a solid portfolio of operating businesses run by capable people and has already started delegating some of the day-to-day portfolio management to Ted Weschler and Todd Combs. And Buffett is famous for preferring “idiot-proof” businesses that should perform well long after the Oracle is no longer with us.
In his own words, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
Berkshire should be a solid choice as a long-term growth stock for retirement.
Retail — at least the traditional kind — is dead. I order nearly all of my clothes, electronics and assorted toys for my kids online.
But there is one retail store that I tend to visit in person, and that is Home Depot Inc. (HD).
It’s not that I particularly enjoy browsing the aisles for sandpaper, caulking guns or hex wrench sets. It’s just that when I need a random tool, it’s usually because I’m waist-deep in a home project I had no business doing and I need to ask someone for help. I also want to feel the tools in my hands to see how they grip and ask follow-up questions. I often leave the store with an entire different set of tools and materials than I originally intended to buy.
I suppose I could have ordered my hot water heater online when my old one broke a few weeks ago and saved a few bucks. But that also would have meant going without hot water for multiple days, and I wouldn’t have had a lot of faith that I had ordered the right model. HD made my life a lot easier.
There is no retail business that I can credibly say with 100% certainty is “Amazon-proof.” But Home Depot comes awfully close, and it shows in its numbers. Revenues dipped during the 2008 meltdown and the housing bust that followed, but they didn’t stay down for long. Home Depot returned to growth in 2010, and it hasn’t looked back since — including a Q1 earnings report that showed profits jumping 16%.
A decade or two from now, Home Depot probably won’t be expanding at today’s rates. But I think it’s safe to say that HD has many years of solid growth in front of it.
I don’t buy coffee from Starbucks Corporation (SBUX) as often as I used to. My Nespresso machine at home makes better coffee at a fraction of the price, and I don’t have to wait in line or use snooty words like “venti” to describe my order.
Still, I do duck into a Starbucks from time to time to get a little work done when I’m travelling on business, and it seems that it never gets easier to find a table. Starbucks has been a mainstay of American culture for over two decades now. It’s as busy and bustling as ever. SBUX has done a remarkable job of keeping its menu interesting and continually inventing new coffee concoctions.
At some point, Starbucks will run out of places to expand. But I don’t know that that will happen on the investment timeline of anyone reading this article. It seems that buying overpriced coffee in a paper cup is a rite of passage into the global middle class, and there are still multiple billions of lower-income consumers yet to join their ranks.
Starbucks’ revenues barely dipped during the 2008 meltdown and Great Recession and are hitting new highs with every passing year. And to top it off, Starbucks is more profitable than at any point in its history based on its return on equity.
A lot can happen over the span of one’s retirement. But I think it’s safe to say that SBUX is a stock that will outlive us all.
Alessio Jacona via Flickr
I’m the first to admit that I’ve consistently underestimated Nike Inc. (NKE) over the years. As ridiculous as this sounds now, I thought Michael Jordan’s retirement in 1998 — nearly 20 years ago — would stunt the brand’s momentum. (We’ll all just agree to forget that Jordan came out of retirement in the early 2000s to play for the Washington Wizards. That never happened.)
Nike’s sales did indeed slow down for a couple years. But by the mid-2000s, NKE was growing faster than ever, and it has yet to really slow down.
I also thought upstarts like Under Armour Inc. (UAA) and Lululemon Athletica Inc. (LULU) would eat into Nike’s growth and depress margins. That very well may happen at some point, but it certainly hasn’t happened yet. Nike’s return on equity is sitting at multidecade highs.
I have no idea what the economy will look like in 10 years. At the current rate of technological change, we may very well be living the world of the Jetsons by then. But it’s probably safe to assume that people still will be spending large sums of money to dress like their favorite athlete, and Nike will likely still have a large chunk of that market.
This article is from Charles Lewis Sizemore of InvestorPlace. As of this writing he was long AAPL.
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