Nancy Tengler on Barron’s: 5 Stocks Advisors Say to Buy for the Next 10 Years
For most of 2022, the market has been a grim place, with stocks swept up in the Federal Reserve’s war on stubbornly high inflation. But while the long-term outlook for markets might seem gloomy, individual stocks can shine. Wise investors give their holdings years, not months, to pay off. With that in mind, Barron’s asked five investing professionals to look far ahead—a full decade—and recommend a single stock that they think investors should buy and hold for the duration.
CEO and Chief Investment Officer Laffer Tengler Investments
10-year pick: Amazon.com AMZN +3.15% (AMZN)
Even though it seems like an obvious name, it’s one we think is attractively valued. We are GARP (growth at a reasonable price) managers, and buy stocks based on relative valuation. With companies that don’t pay a dividend, we look at the relative price-to-sales ratio: What am I paying for a unit of sales today compared with what I paid historically or what I would pay if I just bought the index? Amazon is cheap compared with its history, and well into our buy range.
While the stock has underperformed recently, the company has a lot of levers to pull in all of its businesses. The first is pricing power. Amazon raised the price of its Prime service by 17% and received nary a pushback. That’s about $2 billion that goes basically straight to the margin.
Then you have Amazon Web Services [which provides on-demand cloud-computing platforms]. I think people feared its growth would slow. But CIOs are still increasing their software budgets, and the majority of that spend is going into cloud and enterprise. The cloud narrative is still in its early innings and has a strong tailwind behind it. One reason is that it’s a solution for companies that want to improve productivity in the face of worker shortages and rising wages. So we expect to see AWS continue to do heavy lifting for the company.
Also, advertising for the company has really hung in there. Yes, advertising is economically sensitive, but the advertising for e-commerce on their site is pretty high-margin.
Lastly, CEO Andy Jassy has done a great job of taking costs out. Amazon was overheadcounted and had too much warehousing capacity. He has basically taken all of that out.
Managing Director, Rose Advisors (Hightower)
10-year pick: Canadian Pacific Railway CP +1.26% (CP)
I like railroads because they’re a scarce asset—there’s only so much railway in North America. Canadian Pacific is a Class 1 railroad, and consolidation has diminished the number of Class 1 rails over the years. Canadian Pacific, which is in the U.S. and Canada, recently merged with Kansas City Southern, which is in the U.S. and Mexico. So this is the only rail line that goes from Mexico through the U.S. all the way up to Canada.
I believe we’re in an era of deglobalization. And when you think about the beneficiaries of this shift, you look to places like Mexico. It’s an area where you can produce relatively cheaply for North America in several sectors. Grain, energy products, agriculture, hardgoods, automotive—it can all be shipped via rail. So this is an onshoring play. And in an inflationary environment, Canadian Pacific has a lot of pricing power, because there are only so many rails, and their costs are fixed. Whatever inflation they’re facing, they’re pricing above it, and that’s good for margins.
Operating ratios are an important metric for the railroad industry—the lower the better. Canadian Pacific’s operating ratio was in the high 50% range last year. By the second half, it will be in the mid-50% range. If it can continue to get that operating ratio down, and it will, that will be very beneficial to the valuation of the company over time. I like to buy companies that I think are trading at a significant discount to their future intrinsic value. And I think Canadian Pacific definitely is there.
Founder, Chief Investment Officer, Treasury Partners
10-year pick: Microsoft MSFT +1.97% (MSFT)
When you look at Microsoft from 30,000 feet, you see multiple drivers of revenue that all have secular growth characteristics, whether it’s software in Windows, the cloud in Azure, games through Xbox and Minecraft, and, of course, LinkedIn.
Unlike other large tech companies, Microsoft has very low levels of economic, regulatory, and geopolitical risk. It’s got superstrong financials. It’s one of only two companies rated triple-A by credit-rating agencies. Cash exceeds debt. In the trailing 12 months, it returned roughly $50 billion of capital to shareholders. We anticipate that will continue.
I think Microsoft has one of the most resilient earnings stories in technology. What are there, 350 million users now of Microsoft Office? It’s got a superstrong presence across all parts of the cloud. This theme of cloud migration is going to be very secular. Microsoft has a large moat around its business. If you poll CIOs, they view Microsoft as their most indispensable IT vendor.
The price is about 23 times forward earnings, so it isn’t cheap. But the company has tremendous growth drivers—its free cash flow was up 18% in 2020, up 24% in 2021, and up 16% for the fiscal year that just ended in June. This isn’t like a lot of companies that only benefited from work-from-home during Covid. This is a secular growing company with large elements of free-cash-flow growth that I expect to continue. I’m willing to pay up for a name like this.
Chief Investment Officer, Stack Financial Management
10-year pick: Chevron CVX +3.38% (CVX)
When you’re looking 10 years down the road, you need an excellent management team that’s able to consistently show discipline and the ability to navigate different types of environments. Going back to the huge downturn in oil prices in 2014, 2015, Chevron was one of the first energy companies to say, “We’re going to focus not on getting as much oil out of the ground as we can, but on becoming very shareholder friendly.” It became focused on the dividend, on reducing costs, and navigating the lower-for-longer oil-price environment from 2015 until 2021.
“Historically, the best returns have come from stocks in market segments that have largely been forgotten by the average investor.”
— Zach Jonson
You also need a company that is an integral part of a larger growth cycle. The spike in European energy prices highlights the danger of trying to transition away from fossil-fuel sources prior to having a viable substitute. But we also believe the transition to renewable-energy sources will not exclude companies like Chevron; instead, it will be an integral part of ensuring the process is successful. Chevron recently completed the acquisition of a group that produces a complete line of renewable fuel sources, and it is expected to spend about $10 billion in low-carbon investments through 2028.
A stock you pick for a 10-year cycle also has to be unloved and underowned. Historically, the best returns have come from stocks in market segments that have largely been forgotten by the average investor. The energy sector as a whole now makes up about 4.7% of the S&P 500 index; in 2008, it was 16%. The energy sector will experience substantial changes, and companies like Chevron will go through a reinvention of themselves, but we view this as an opportunity for growth, not a reason to avoid them.
Jenny Van Leeuwen Harrington
CEO and Portfolio Manager, Gilman Hill Asset Management
10-year pick: Lamar Advertising LAMR +3.66% (LAMR)
Lamar is the largest owner of billboards in the country. Just 3% of the portfolio is digital, but those billboards make up 27% of revenue. And the price of digital billboards is about a third of what it was in 2005, when Lamar started doing them in a meaningful way. So it’s got this part of its business that is a serious grower.
When the internet started to explode, everyone felt that all the old forms of advertising would die off. But billboard advertising has actually held on and become a very stable part of advertisers’ total portfolios. This is probably the only form of advertising where you have a captive, diverse audience. And driving miles, even though they plunged for a short time in 2020, continue to increase.
One of the reasons I’m comfortable holding this for 10 years is that you can now look at two terrible periods of stress tests. During the great financial crisis, revenue dropped by 13% and Ebitda [earnings before interest, taxes, depreciation, and amortization] dropped by 19%, and the recovery time was four years. In 2020, revenue dropped by only 10.5%, and Ebitda by 14%. The recovery time was one year. If I’m recommending a stock for 10 years, I want to know that it can make it through whatever nastiness comes our way. And when I look at Lamar’s history I think, “This is a company where bankruptcy has never been in the cards.”
Over the past 10 years, revenue CAGR [compound annual growth rate] has been about 4.7%. And Ebitda CAGR has been 5.2%. I think mid-single-digit growth is reasonable to expect over the next 10 years. And Lamar is currently paying a 5.2% dividend.
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