Market investors should take a long view – as Warren Buffett likes to say, if you can’t see yourself holding onto a stock for 10 years, you shouldn’t even hold it for 10 minutes. But the long view for investors in their 30s is not the same as for those in their 50s. So, what should younger market players look for in a stock?
For them, the game revolves around stability, reliability, and returns. Younger investors should look for stocks that they can use to park their money, watch it grow through share appreciation, and quietly reinvest a dividend quarter after quarter. Here we’ll look at three stocks that fit this bill.
Apple, Inc. (AAPL)
Apple is the only tech company we’re looking at today. Its days as a shoe-string start-up in the home computer industry are long gone, and it has reinvented itself time and again over the past 40 years, but Apple’s allure for investors isn’t just the ongoing excitement of shiny new devices. Apple also offers a long history of stability (this company isn’t going anywhere), a more recent history of strong share gains (the stock has been gaining steadily since 2006), and reliable dividend to reinvest (at 1.45%, the yield is modest, but the annual payout is over $3 per share).
The company’s difficulties in the past 12 months are well-known. The US-China trade tensions and the general maturation of the smartphone replacement cycle have cut into iPhone sales, while the Mac, iPad, Wearables, and Services sectors have not yet fully ramped up to compensate for iPhone’s lower revenues. Still, Apple sees a light at the end of that tunnel.
In its most recent quarterly report, revenues and EPS both beat the forecasts. Mac, iPad, and Wearables each brought in more than $5 billion, and Services’ revenue of $11.46 billion was an all-time record. That last is important, because Apple has based its forward strategy on new services to monetize the 900-million strong global iPhone customer base.
Going forward, this fall will see new iPhone models with new sensors and upgraded cameras, along with the launch the Apple TV+. Expect the new phone in September, but don’t expect them to bring anything spectacular to the table – early indications are, they will be incremental upgrades in line with the slowing replacement cycle. Apple TV+, however, will be competing with Netflix, Amazon, Disney, and Comcast, and will have to clear a higher bar than ‘incremental upgrade.’ With pricing estimated at $9.99 per month, it will be competitive but at the upper end of the range. Industry watchers expect that Apple may bring in as many as 100 million Apple TV+ users in the next 5 to 7 years.
Top Wall Street analysts agree that Apple is poised to recover from its recent setbacks and volatility. Krish Sankar, 4-star analyst from Cowen, lists four drivers for the stock in coming months: “Apple TV+ will be competitive with the 3 big incumbents; forecast of 12 million to 21 million TV+ subscribers in FY20/21; up to 40 original programs under development for TV+, as much as $2.8 billion in content spending in the next 2 years; and, TV+ to drive incremental EPS of 20 to 25 cents per share for 10 million subscribers in FY 20/21.” In short, Sankar sees the new TV streaming service with a leading role in revenue generation. His price target of $250 suggests a 17% upside for AAPL shares.
5-star analyst Timothy Arcuri, of UBS, agrees, seeing plenty of room for growth in Apple. However, Arcuri believes that the Wearables segment will be the main growth engine. He notes, “Wearables grew nearly 50% in the most recent quarter, contributing materially more Y/Y growth than the services segment for the first time in company history.” He adds that the “Wearables business is under-appreciated and is what's moving the needle for overall growth.” Arcuri’s $235 target on AAPL implies an upside of 10%.
APPL shares have a Moderate Buy rating from the analyst consensus, based on 16 buys, 11 holds, and 1 sell. The stock’s $224 average price target gives it a 5.7% potential upside from the current share price of $212.
Walmart, Inc. (WMT)
Everyone knows Walmart as the place for cheap groceries and household goods, and to make fun of low-end shoppers. What’s less visible, however, is that Walmart stock has been a steady gainer since the late 1980s. The discount superstore can rely on size to insulate it from most market disruptions. It is the world’s largest retailer, largest private employer, and largest private company, with annual revenues easily topping $500 billion.
Walmart is reliably solid. It is also proving itself surprisingly adaptable, a trait that huge corporations sometimes find difficult. The growth of e-commerce in the last decade has made clear that Amazon.com (AMZN) is Walmart’s main competitor, and Walmart has responded with moves into the online retail space. The retailer is not recasting itself as an e-tailer; rather, Walmart is leveraging its existing logistical network and store locations to complement online sales. For example, Walmart can’t offer the same fast delivery as Amazon Prime – but it can offer in-store pickup for online orders. And since, by some estimates, 90% of the US population lives with 10 miles of a Walmart store, that’s a convenient option – and Walmart’s online sales have been improving in recent quarters.
As a return investment, WMT does deliver. It’s up 20% year-to-date, and the company is consistent and reliable at paying its 1.89% dividend. While the dividend yield sounds low, it’s actually in line with the S&P 500 average, and the share price is high enough that the annual payout is $2.12. It’s a nice bonus to pocket or reinvest.
Walmart’s strong and reliable performance has brought it fans from Wall Street. Guggenheim analyst Robert Drbul rates WMT a Buy and says, “We were encouraged by the 1H momentum… U.S. comps were +2.8% (vs. our +2.5% est.) with broad-based strength. The comp included gains in both traffic (+0.6%) and ticket (+2.2%). Traffic accelerated on a two-year basis.” He raised his price target 8%, to $125, implying an upside of 11%.
KeyBanc’s Edward Yruma notes, “Walmart is active in markdowns and investing in price… yet gross margins are still better than expected. The company sees continued strength in private brands and operational discipline at the executive level.” He puts a $128 price target on WMT, with an upside of 14%.
Walmart’s Moderate Buy consensus rating comes from 13 buys and 6 holds. Shares sell for $112, and the $120 average price target suggests a 7% upside.
Waste Connections (WCN)
Garbage collectors don’t get the same hip reputation as the tech companies, but as far as investing goes, the big waste collection companies are top-grade. Their greatest advantage, of course, is that modern society is messy, so the clean-up companies will never want for business or customers. Waste Connections fits that bill. It is the third largest garbage collection company in North America.
In its Q2 earnings, released at the end of July, WCN reported revenue of $1.37 billion and EPS of 69 cents per share. EPS beat the forecast by 6%, while revenues were in line with expectation. This was the third time in the last four quarters that WCN had beaten the EPS estimates. The earnings stayed good when measured year-over-year. Q2 2018 showed EPS of 65 cents on $1.24 billion in revenues, so the gains are clear.
Like Apple and Walmart, and based on its steady earnings, WCN brings in strong returns. The company has been beating the market averages. WCN shares are up 24% year-to-date, against a Dow Jones gain of 12% and an S&P 500 gain of 16%. The dividend is modest, in fact, the lowest of the three stocks in this review at just 0.69%. But it is reliable – the company makes sure to pay it out regularly and has raised the payout steadily over the last 8 years. The current payment is 64 cents per share annualized.
Wall Street’s analysts like this stock. BMO Capital’s Devin Dodge sees it continuing to outperform the market and gives WCN a $105 price target, and RBC Capital’s Derek Spronck takes a similar stance with a $100 target. Writing from Raymond James, 5-star analyst Patrick Brown raised his price target to $106 and called the stock a Strong Buy.
Brown is in line with the analyst consensus here. WCN has a Strong Buy based on 3 buys and 1 hold, and an average price target of $103. Shares are trading for $92, so that target suggests a 12% upside.
Disclosure: This author is long on AAPL.