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My 10 stocks for the next 10 years
Hot products come and go. Instead, look for companies that can move quickly and adapt themselves when opportunity arises. These companies can.
By Jim Jubak
Im going to give you my 10 stocks for the next 10 years in this column. And Im going to do it by standing the usual method for making long-term picks on its head.
Lets be honest: Most attempts to pick long-term stock market winners are miserable failures.
Part of that is a reflection of just how hard it is to make profitable long-term picks. Its tough enough to see a couple of quarters ahead, let alone predict the winners and losers 10 years into the future.
It doesnt help, though, that most attempts to pick long-term winners are bass-ackward. Theyre pretty much doomed to failure from the get-go because they misunderstand what makes a stock a long-term winner. Most begin with a big opportunity and then look for companies with products poised to exploit that trend.
Hogwash. That can work reasonably well if youre investing for, say, the next year or two. In that time span, a new product or a turn in the product cycle can make a huge difference in investors perceptions of a company and the price of its stock.
Look at a companys internals
But over a decade, a companys current product portfolio is far less important to the long-term appreciation of its stock than the internal strengths and weaknesses of the company. Internal corporate structures and systems for successfully attacking their markets are more predictive of long-term stock market success than are ownership of currently hot products in fast-growing markets.
Think of this list of examples. The personal computer itself -- now dominated by Dell (DELL, news, msgs) and not the research and development powerhouses of IBM (IBM, news, msgs) or Hewlett-Packard (HPQ, news, msgs). Dial-up Internet service -- certainly America Onlines roundly criticized software wasnt the key to that companys success against Prodigy and CompuServe. Big box retailing -- Wal-Mart (WMT, news, msgs) demolished established retailers and imitators alike even though the company offered outwardly similar stores. The automobile industry -- Toyota Motor (TM, news, msgs) and Honda Motor (HMC, news, msgs) continue to take market share in what is a mature, commoditized industry.
None of those stock market success stories is built around a product innovation radically superior to those of competitors. In each case, the success hinged on the companys ability to build an internal system that created a lasting competitive advantage over others in its industry. Dells computers, for example, sell so well because they are built from commodity parts. That allows the company to create machines to individual customer orders and ship them out the door with minimal overhead and at low prices. Or to take another example, Wal-Marts stores dont succeed because of better design or superior product offerings. Instead, the secret is the companys quick-response inventory system that tells managers immediately what sells and allows them to constantly drive prices lower.
Can they adjust to exploit their opportunities?
To look for stocks for the next 10 years that might perform as well as Dell and Wal-Mart have over the last 10, start with an opportunity trend thats big enough to last a decade. But dont stop there, and certainly dont concentrate on the hot product of the moment. Instead, look for companies that have built internal structures capable of exploiting those opportunities as they shift character and direction over the next decade.
Let me give you some opportunity trend examples in three areas and the names of some companies built to exploit them.
Trend: technology
Forget mobile computing, flat screens, or next generation wireless. The two big trends here to watch are: increasing systems complexity and declining prices for technology products.
Complexity plays out like this: Increasingly intricate technology systems have customers -- who purchased expensive systems from various vendors in the past decade only to discover the technology incompatible -- demanding single-source solutions. Also fueling the trend is a need to improve customer service and new regulatory pressures, especially in privacy areas, that demand information systems be able to tag and segregate data in more complex ways.
At the same time, as ever more complex technology systems are performing more and more tasks, the price of technology products continues to drop. With capital readily available and cheap for building new technology factories in Asia and elsewhere, component prices will continue to fall. And as more and more of these new component suppliers move up the food chain, they will put ever-increasing pressure on the prices of finished technology products.
Who wins in the technology race:
- Cisco Systems (CSCO, news, msgs). The networking giant is on the verge of becoming the dominant one-stop shop for a big hunk of the telecommunications industry.
- Intel (INTC, news, msgs). The chip company is one of the few technology companies built around manufacturing systems that drive down costs every year.
Companies to watch in this space: EMC (EMC, news, msgs), which has made acquisitions to add massive amounts of software to its dominant hardware storage business in an effort to become the one-stop data processing and storage system company; Samsung Electronics (SSNLF, news, msgs), which is putting some of Intels tricks to work against the chip industry leader; and Xilinx (XLNX, news, msgs), which is in the business of selling chips that help its technology customers drive down costs while increasing the complexity of their products.
Trend: the rise of China and India
The developed countries of Europe, Japan, and the United States wont drive global economic growth in the next decade. China and India (and, potentially, other nearby Asian countries such as Vietnam) will.
Making a buck in those rapidly expanding economies wont be easy, however, because both countries are skilled at quickly developing local products that compete with, at lower prices, successful imported products. So the key here isnt so much product -- which can be easily duplicated -- but dominance in marketing that comes from a superior distribution system and product cache that cant easily be matched by local producers.
Who wins in China and India:
- American International Group (AIG, news, msgs). The financial services company sells financial products to the rising Asian middle class that is attracted by the Western reputation for superior service and returns.
- Avon Products (AVP, news, msgs). The company has expanded its Avon Lady distribution system into China, giving it shelf space that no competitor can match.
- Rio Tinto (RTP, news, msgs). The global mining company supplies raw materials, most significantly iron, to those economies from relatively nearby sources.
Trend: cutting the cost of aging in the developed world
Thanks to falling birth rates that are adding fewer children to the population and improved life expectancies, the population in countries such as Japan, Italy, and Germany is rapidly getting older. The United States, with its more liberal immigration policies, is aging as well, if not as rapidly.
An older population is a huge consumer of medical products and services. Their growing numbers will lead to an increase in demand for drug therapies, nursing care, and surgical implants that address some of the medical problems that can come with aging. But these companies are likely to face a cost squeeze because no one has yet figured out how these aging societies will pay for these higher costs. So the winners will be companies that can supply medical products at the lowest cost or that offer therapies and services that prevent disease or otherwise lower the cost of aging.
Who wins in cutting the cost of aging:
- Pfizer (PFE, news, msgs). Thanks to its huge sales force, the pharmaceutical company is in a position to get a larger share of the drug dollar as companies with hot new drugs decide to let Pfizer sell them.
- Teva Pharmaceutical Industries (TEVA, news, msgs). As the low-cost producer of generic drugs, it will continue to ride the trend toward generics.
Companies to watch in this space: NPS Pharmaceuticals (NPSP, news, msgs), which has an interesting osteoporosis drug in development.
Trend: the rising cost of capital
It looks like were headed toward a decade where capital costs more and at the same time the creditworthiness of most potential borrowers declines.
Lots of smaller trends feed into this mega-trend. An aging world, for example, is likely to consume more of the supply of savings. Most of the industrial world is now running with structural budget deficits and the central banks of the exporting countries have been printing money in an effort to keep their own currencies cheap. All this should push up interest rates around the world over the next 10 years. Winners will be companies that can raise capital at the lowest cost, thanks to their own creditworthiness and ability to generate cash internally, and that can then manage to invest that cash at higher rates.
Who wins at coping with rising capital costs:
- Berkshire Hathaway (BRK.B, news, msgs). Warren Buffetts holding company has a rock-solid credit rating and generates a river of cash internally. As a result, its cost of funds to finance new investments is close to zero.
- Exxon Mobil (XOM, news, msgs) and BP (BP, news, msgs). These energy giants will be able to invest their huge cash flows in new energy properties at high rates of return.
Thats my list of 10 for the next 10 years -- plus a few to watch as trends develop. Theyre certainly not the only stocks you can buy to take advantage of these trends, but they do have the internal structures that a company needs to exploit any of these opportunities. And these trends arent the only ones that will drive the next decade. I think environmental improvement will offer its own set of opportunities that are worth a future column on their own.
Instead of being exhaustive, I hope this list and this method stimulate your own thinking about long-term investments.
Theres good reason to be thinking about long-term investing right now. Currently, you can find a ton of advice on whether the market will be higher in the next three months or not. You easily gather more opinion than you can digest on whether tech stocks will crater or not sometime in the next six months. A few daring thinkers are even willing to forecast the economic climate for the second half of 2004.
The contrarian in me suggests that this is the right time to be working on the long-term core of a portfolio rather than chasing overpriced stocks.
Of course, none of the stocks Ive mentioned in this column are cheap. In fact, most of them are fully priced. If youre looking for short-term momentum plays or big quick gains, look elsewhere.
But lets keep in mind that long-term investing is a solid strategy, if you pick the right stocks, because you make time and compounding work for you. The companies Ive named are able to reinvest their cash flows over and over again at a rate of return well above that paid by a CD. Its that compounding at a high rate of return that youre buying. (I suggest using dollar cost averaging to build a position in any of these stocks.)
Still, it wouldnt hurt to find some less-well-know long-term winners that are selling at more reasonable prices. That will be the subject of my next column.
New developments on past columns
In this rally, dont spit into the wind
On October 14, State Street (STT, news, msgs) said it earned 60 cents a share in the third quarter, at least 3 cents better than the consensus estimate and 4 cents better than a year earlier. (I say at least because the 60 cents a share represents conservative GAAP accounting and the company also reported 66 cents a share in operating earnings, which excludes merger and restructuring charges.) Just as important as the earnings number was how State Street achieved it. While the banking and investment management company continued cutting costs, the big surprise was a huge jump in revenue -- $1.13 billion, up 18% from a year earlier and up 4% from the second quarter. The figure also handily exceeded the consensus revenue estimate of $1.09 billion. State Street management didnt raise its fourth-quarter projections, but I think the strength in third-quarter revenue growth justifies an increase in my target price. As of Oct. 17, Im raising my target price to $54 a share by December 2003 from $48.
3 food stocks face a leaner, meaner world
On October 13, Smithfield Foods (SFD, news, msgs), already the nations largest pork producer, won a bidding war to acquire the pork operations of bankrupt Farmland Industries, the No. 6 producer. The purchase price came to $367 million in cash and about $90 million in assumed liabilities. The deal is projected to add about 5 cents a share to Smithfields earnings in the first year. The acquisition is still subject to the approval of the bankruptcy court, but the U.S. Justice Department already has signed off. It says the deal doesnt violate antitrust rules because, even after acquiring Farmlands pork assets, Smithfield would control only 27% of the market. Tyson Foods (TSN, news, msgs) will be a strong No. 2 with 19% of the pork market.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: American International Group, Berkshire Hathaway, Pfizer, and Smithfield Foods. He does not own short positions in any stock mentioned in this column.
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