A lot can happen in 50 years' time, and you likely won't buy a stock and ignore it, so it seems almost disingenuous to talk about holding stocks for five decades. While there are no companies that you can simply forget, there are some that significantly increase the chances that they'll still be beating the market come 2068.
With that in mind, we asked three Motley Fool investors to choose top companies that they believed were positioned to stand the test of time. They offered convincing arguments for Apple (NASDAQ: AAPL), Paycom Software, Inc. (NYSE: PAYC), and Johnson & Johnson (NYSE: JNJ).
Image source: Getty Images.
Take a cue from an investing legend
Danny Vena (Apple): It might be tempting to think that the iPhone is Apple's swan song and dismiss the company as a has-been, and many investors have long predicted just that. Some have even foretold the death of the iPhone 10, but that ignores the reality.
In the recent earnings release, Apple reported second-quarter records for both revenue and earnings, and Apple CEO Tim Cook said "Customers chose iPhone X more than any other iPhone each week in the March quarter, just as they did following its launch in the December quarter." The company set all-time record sales from the App Store, Apple Music, iCloud, and Apple Pay. The company will likely achieve Cook's goal of doubling revenue from Apple's services segment by 2020.
Berkshire Hathaway CEO Warren Buffett, one of the world's most followed investors, signaled his faith in the company when it was revealed that he had purchased a massive 75 million Apple shares over the past quarter, in addition to the 165 million shares already owned, increasing his stake in the iPhone maker to about 5% of the company's shares.
Buffett scoffed at the thought of grading the company based on how many phones it sold in a quarter, saying:
Nobody buys a farm based on whether they think it's going to rain next year or not. They buy it because they think it's a good investment over 10 or 20 years ... The idea of spending loads of time trying to guess how many iPhone X ... are going to be sold in a given three month period, to me, it totally misses the point.
This is a clear indication that Buffet believes that Apple will be a solid investment for decades.
Other reasons to like the company abound. The company raised its quarterly dividend by 16% to $0.73 per share, which is funded by less than 25% of Apple's profits. The company also announced a new $100 billion share buyback. At current prices, this could reduce Apple's share count by an additional 10%.
Image source: Apple.
Finally, there's Apple's valuation. Even after the stock's recent run-up, it sells for just 18 times trailing earnings, far below the 25 times for the S&P 500.
A compelling valuation, a solid and growing dividend, significant share buybacks and record-setting results all show why Apple is positioned to grow for the next 50 years.
But don't take our word for it. Ask Warren Buffett.
Growth and profits
Tim Green (Paycom Software): I'll be the first to admit that growth investing is not my style. I don't want to have to be right. Being right is hard. Instead, I want such a large margin of safety that I can be wrong to a degree and still have a positive outcome. High-priced growth stocks generally don't offer that.
While I wouldn't buy shares of Paycom Software at today's prices, I like the company. Paycom offers a cloud-based solution for payroll processing and other human resources tasks. What's notable about Paycom is that the company is solidly profitable. Many fast-growing software-as-a-service (SaaS) companies pour resources into sales and marketing to juice their growth at the expense of the bottom line. Paycom is different.
Image source: Getty Images.
In 2017, Paycom grew revenue by 31% to $433 million. Sales and marketing expenses ate up just 34% of revenue. Compare that to an unprofitable SaaS company like HubSpot, which spent 57% of revenue on sales and marketing last year. As a result of Paycom's efficiency in winning new business, the company managed a GAAP operating profit of $78.6 million, good for a double-digit operating margin.
You don't find SaaS companies like this very often, able to grow revenue at a brisk pace while generating fat margins. Unfortunately, the market recognizes this excellence, pricing the stock at a whopping 96 times last year's GAAP earnings. If your holding period is 50 years, the company should eventually grow into that valuation, assuming it continues to perform well. If it doesn't perform well, the stock has a lot of room to fall.
If I were forced to buy a growth stock and hold it for decades, I would pick a company that has a proven business model and a track record of strong profitability. Paycom would be at the top of my list.
A solid, diversified record of safety
Rich Duprey (Johnson & Johnson): Few companies have the pedigree to compete against Johnson & Johnson. A behemoth in personal care, pharmaceuticals, and medical devices, the company has a well-diversified stream of revenue. It may be the ultimate defensive stock, solid in a portfolio in both good times and bad, and sporting a history of dividend increases that make it a Dividend Aristocrat.
Almost half of Johnson & Johnson's sales come from its pharmaceutical business, which in the first quarter recorded another strong performance, with revenues jumping 20% year over year as both new products like Darzalex and Imbruvica as well as those in its core such as Zytiga and Stelara were well received.
Image source: Getty Images.
On the consumer products stage, beauty products such as Aveeno and Neutrogena helped drive sales up 5% and medical device sales were up 7.5% on the strength of its Acuvue contact lens business.
Johnson & Johnson has been around for 130 years and its track record over that time makes it a pretty sure bet it will be around for another 50 as a leading consumer products and pharmaceutical giant. At 23 times trailing earnings and 14 times analyst estimates for 2018, you're not going to find Johnson & Johnson's stock in the discount bin. But it is a solid performer with a better than solid reputation that continues to have growth prospects in all its segments.
This is a company investors can feel confident that even if it does stumble here and there over the next five decades, it will bounce back stronger than ever.
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Danny Vena owns shares of Apple. Rich Duprey has no position in any of the stocks mentioned. Timothy Green owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Johnson & Johnson, and Paycom Software. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and short May 2018 $140 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.