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All Contents © 2018The Kiplinger Washington Editors
By Will Ashworth
| April 20, 2017
Almost a year ago to the day, InvestorPlace’s Dan Burrows highlighted the 10 best-performing S&P 500 stocks of the past decade. The most important lesson one finds studying these highflying stocks is that patience wins out over all other attributes of a successful investor.
A classic example of how true this is involves the Fidelity Magellan Fund, the large mutual fund made famous by portfolio manager Peter Lynch. Lynch ran the fund for 13 years from 1977 until 1990, growing it from $20 million to $14 billion before stepping aside.
Fidelity studied the returns of Fidelity Magellan unitholders over those 13 years to see how they did compared to the legendary portfolio manager. While Lynch managed to achieve a 29% annual return over this period, the average investor lost money.
Patience would have served those investors well, as the ups and downs of the stock market shook them out of their positions — and in doing so, depriving them of millions of dollars in profits. A $10,000 investment in 1977 held until 1990 was worth $273,947 by the end of that 13-year period.
I’m not Peter Lynch, but I can say with some confidence that the examples to follow are the 10 best stocks to buy for the next decade.
Let’s take a look.
Prices and data are from the original InvestorPlace story published on April 19, 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.
Not only is Amazon.com, Inc. (AMZN) CEO and founder Jeff Bezos a great chief executive, but Amazon has its hands in so many pies — including a very profitable cloud business that generates almost $1 billion in annual operating income — that it’s hard to fathom just how big Amazon could be a decade from now.
While Amazon’s AWS cloud business is a big deal, Amazon Prime is the service that delivers the goods when it comes to building the foundation for AMZN stock. More than 100 million people subscribe to Amazon Prime at $99 per year.
It’s not the $9.9 billion in annual subscription revenue that matters, but the amount each of those subscribers spends on other Amazon products. Statistics show that 76% of Amazon Prime members spend more than they did before paying the annual $99 fee.
That’s what you call “pulling power,” and it’s a big reason why AMZN stock will be a winner for the long haul.
Howard Young via Flickr
If you bought Blue Buffalo Pet Products Inc. (BUFF) at its July 2015 IPO price of $20 and you’re still holding it through April 17, you’ve made money — barely.
The pet food maker has been on a wild ride since going public almost two years ago. It opened with a first-day return of 36%, but proceeded to fall from $28 to $16 in the span of a couple months, only to gain most of that back by its one-year anniversary.
However, BUFF is an explosive stock lying in wait.
Blue Buffalo is investing $150 million-$170 million in 2017 to expand its manufacturing capacity so that it can accommodate further growth beyond 6% of the $28 billion U.S. pet food market. In 2016, its adjusted earnings per share increased 27.2% to 79 cents; it expects that number to increase by as much as 19% in 2017 to between 91 and 94 cents per share.
Over the past five years, Blue Buffalo has more than doubled its revenues, from $523.0 million in 2012 to $1.1 billion in 2016, while growing net income from $65.5 million to $130.2 million in the same period.
People will continue to spend more on healthy food in the coming decade, and that includes for their pets. Blue Buffalo is ready to capture more of those gains, and BUFF shareholders will benefit as a result.
You can say what you want about the iPhone maker’s best days being behind it, but I have a feeling Apple Inc. (AAPL) will continue to create products people want to buy for years to come.
What they are, I couldn’t tell you.
What I do know is that Apple will continue to generate a huge amount of free cash flow — $52.5 billion in the trailing 12 months through Dec. 31, 2016 — to reward shareholders for their patience and loyalty. AAPL currently converts 71.7% of its EBITDA into free cash flow, which is pretty darn close to the 77.7% conversion rate of Amazon — a company known for doing a good job converting cash.
The most recent rumor on Wall Street has Apple and Walt Disney Co (DIS) hooking up to form a media and tech conglomerate. While speculative in nature, the combination would provide Apple with a few more avenues to generate ideas for new products.
At this point, while I like Disney, I’d say it needs Apple more than Apple needs it.
Mike Mozart via Flickr
Warren Buffett is 86 years old. Eventually, he’s going to step out of the game. The argument is that his departure will create a panic that will send Berkshire Hathaway Inc. (BRK.A, BRK.B) stock spiraling downward.
Personally, I don’t subscribe to that theory.
Businesses — whether it be a huge holding company like Buffett’s or something much less grandiose — are valued by calculating the present value of its future cash flows. Berkshire Hathaway’s are significant.
Another way to value a business is to look at the sum of all its parts.
Berkshire Hathaway owns hundreds of businesses; each of these firms, if sold at auction, would be worth more than the current stock price would seem to reflect. If Buffett moved on and the company was broken up in a prudent manner over an extended period, Berkshire Hathaway investors would benefit greatly from such a process.
The best part of Berkshire Hathaway? You get a quasi-mutual fund with a diversified group of holdings and no management fees.
That’s the best kind of buy-and-hold investment.
The retail industry is in a freefall at the moment, and yet Illinois-based Ulta Beauty Inc. (ULTA) is busy growing its network of stores — which currently number 974 — by 100 per year. It expects to build out its brick-and-mortar footprint to 1,700 stores over the next decade.
Ulta’s business model provides a shopping experience that is unique in a beauty market where no one firm controls a big chunk of market share, not even Sephora. In fact, Ulta controls just 4% of the $127 billion U.S. beauty market despite having almost $5 billion in annual revenue.
With consumer confidence growing, Ulta stands a good chance over the next decade of bumping this number significantly higher. ULTA shares might be expensive at 43 times earnings, but that’s the price you pay to own the best.
Ulta Beauty helps women with their beauty needs; Sherwin-Williams Co (SHW) does the same for houses and businesses around the world.
What’s the one thing real estate professionals suggest you should do when selling your home? Give it a fresh coat of paint. It’s the most cost-effective improvement you can make to bring in better offers.
Sherwin-Williams originally tried to buy Mexican paint company Comex in 2014 but was beaten out by PPG Industries, Inc. (PPG). More than two years later, it’s in the homestretch of closing its $11.3 billion acquisition of The Valspar Corp (VAL), which will significantly improve its position in the coatings business outside North America.
Over the past decade, SHW has achieved a total return of 17.6% through April 17, more than double the S&P 500.
If any stock can repeat this kind of performance over the next decade, Sherwin-Williams has to be at the top of the list.
Earlier this year, the management of Kraft Heinz Co. (KHC) put quite the scare into the 169,000 Unilever plc (UL) employees with a potential $143 billion offer to buy the company. Fortunately (for employees), Unilever’s management told the companies that control KHC, Brazil's 3G Capital and Warren Buffett's Berkshire Hathaway, to take a hike.
Kraft Heinz is going to make another acquisition, most likely this year. And when it does, the first thing the Brazilians are going to do is trim the fat. (Read this article about Tim Hortons to understand 3G Capital's cost-cutting ruthlessness.) That’s going to mean the loss of a lot of jobs.
While that’s terrible for the people on the receiving end of the pink slips, it’s been proven by 3G Capital time and again to significantly increase the bottom line. Shareholders definitely will win as Kraft Heinz guts PepsiCo, Inc. (PEP) or some other vulnerable target.
I’m of two minds when it comes to 3G Capital’s blitzkrieg management style: On the one hand, people suffer greatly from these job cuts. On the other, I wonder whether those jobs should have been created in the first place.
If you can live with this kind of management ruthlessness, KHC is a great business to own, because people will always have to eat.
Mike Mozart via Flickr (Modified)
Teen discount clothing chain Five Below Inc (FIVE) saw same-store sales increase by 2% in fiscal 2016. That might not seem like a lot, but when you have retailers going out of business left and right, Jim Cramer is right to rave about this stock.
In today’s retail, you either want to be in the discount or luxury businesses … but not in the deadly middle.
Five Below has a plan to grow revenues and earnings by 20% every year until 2020 and beyond. In 2016, revenues and earnings grew 20.2% and 24.5%, respectively, to $1 billion and $71.8 million respectively.
In 2017, FIVE expects to open 100 new stores, bringing the total across the country to more than 600. Five Below sees 2,000 stores open in the U.S. at some point in the future. While it seems like an ambitious goal given how many stores are closing these days, Five Below has a very talented management team led by CEO Joel Anderson, whose previous job was CEO of Walmart.com.
At prices $5 or below, Five Below delivers a concept that’s unique to teen and pre-teen customers. And it should deliver plenty of returns over the next 10 years.
Over the past decade, Cracker Barrel Old Country Store, Inc. (CBRL) has doubled the performance of the S&P 500 by delivering consistent results. Its return on invested capital in 2006 was 8%; today, it’s 14%, well above the restaurant industry average of 9%.
CBRL’s unique restaurant/retail concept generates approximately 80% of its revenue from its restaurants, with its retail shop the remaining 20%. The average store throws off revenue of $4.6 million. The retail business generates sales per square foot of $440 and 50% gross margins.
On April 17, Cracker Barrel opened its first store on the West Coast in Tualatin, Oregon, a suburb of Portland. It plans to open three more locations in the Portland area. Expect continued growth out west in coming years.
Cracker Barrel features a strong female presence in upper management, representing what a modern progressive American company is supposed to look like at the top. Good on them … and good for you, because that kind of diversity will pay off in spades.
Who knew that sleep apnea paid so well?
ResMed Inc. (RMD) manufactures medical devices and provides cloud-based software applications for medical professionals to treat and manage sleep apnea and chronic obstructive pulmonary disease (COPD). Treating 2 million patients daily, ResMed has become good at reducing healthcare costs by minimizing the effects of chronic disease.
Good businesses make and save people and companies money. ResMed does both.
Over the past decade through April 17, ResMed has delivered an annual return to shareholders of 11.9%, 478 basis points greater than the S&P 500. Year-to-date, RMD is up 12.1% and on its way to its fourth year of gains in the past five.
According to a recent study, 26% of adults have sleep apnea — a disorder that can wreak havoc on a person’s heart, not to mention a marriage due to both partners’ lack of sleep. My dad died as a result of COPD, a disease that effects more than 200 million people worldwide and costs the healthcare system more than $50 billion per year in the U.S. alone.
ResMed has growth opportunities in Latin America, Eastern Europe and China and India — all huge markets that will keep it busy for the next decade and beyond.
Of all the stocks to buy for the next decade, ResMed is my pick for most reliable given the markets it serves.
This article is from Will Ashworth of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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