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Top Stocks for 2018 and 2019 -- and the Next Few Decades

Beth McKenna, The Motley Fool

If you're an investor searching for top stocks for 2018, you're probably looking for stocks that you can buy and hold for the long term, right?

If so, here are four best-in-class stocks with solid long-term growth potential that are worth your consideration: graphics chip specialist NVIDIA (NASDAQ: NVDA), e-commerce and cloud-computing service behemoth Amazon.com (NASDAQ: AMZN), water utility giant American Water Works (NYSE: AWK), and water-technology specialist A.O. Smith (NYSE: AOS).  

I'm not suggesting everyone buy all four of these stocks, as recommending a one-size-fits-all portfolio would be foolish -- different investors have different risk tolerances, life circumstances, and so on. That said, I think most investors should be able to find at least one stock among this diverse group that's a great fit for them.

Stacks of money in ascending amounts with a red arrow pointing upward on top of the stacks.

Image source: Getty Images.

Before we dig in, here are some key statistics for our top stocks.

Top stocks: Some key basic stats


Market Cap

Dividend Yield

Projected 5-Year Average Annual EPS* Growth

Forward P/E**

3-Year Return

10-Year Return

NVIDIA  $166.8 billion 0.22% 17.2% 34.4 1,130% 2,150%
Amazon.com $942.7 billion -- 45.9% 76.2  273% 2,200%
American Water Works $15.7 billion 2.05% 8.1% 24.5  75.2% 423%
A.O. Smith $10.1 billion 1.23% 11.3%  20.2 89.5% 882%
S&P 500 -- 1.76% -- -- 55% 176%

Data sources: YCharts and Yahoo! Finance. Data as of Aug. 28, 2018. *EPS = earnings per share. ** P/E = price-to-earnings ratio. 

A tech stock with exposure to AI and other huge trends

NVIDIA stock's spectacular run in recent years is largely driven by the graphics processing unit (GPU) specialist's strong growth in its core computer gaming business and phenomenal growth in its data center business. These two market platforms are the company's largest, accounting for 57% and 20%, respectively, of total revenue in fiscal 2018, as well as its fastest-growing. In fiscal 2018, data center revenue rocketed 133% year over year, while gaming revenue soared 36%. NVIDIA also has two other platforms, professional visualization and auto.

NVIDIA's gaming business is benefiting from the popularity of esports and the battle royale genre of video games, along with the release of games with top-quality graphics. These trends are expanding the total size of the gaming market and leading many existing gamers to upgrade to NVIDIA's higher-end GeForce GPUs, or graphics cards. (These two terms are commonly used interchangeably, though technically, they're not the same thing. A GPU is the main component of a graphics cards, but not the only one.) Rival Advanced Micro Devices (AMD) controls a smaller share of the discrete GPU market than NVIDIA -- 34.9% to NVIDIA's 65.1% in the first quarter of 2018 -- indicating gamers generally prefer NVIDIA's cards.

NVIDIA's data center business is booming thanks in large part to the widespread adoption of cloud computing and artificial intelligence (AI). Its GPUs are the gold standard for accelerating the workloads within deep-learning (DL) networks, with its platform adopted by all the major internet companies and cloud-service providers. (Deep learning is a subset of AI that trains machines how to mimic the way humans make inferences from data.) Investors should watch the competition, particularly Intel's efforts to develop its own AI-optimized discrete GPU and Alphabet's Google unit's progress with its tensor processor unit (TPU). 

NVIDIA's relatively small auto business has the potential for massive growth once driverless vehicles become commonplace across the United States. More than 320 entities are developing self-driving technology with the company's DRIVE AI computing platform. Intel is also a prime competitor to watch here.

In fiscal 2018, NVIDIA's revenue jumped 41%, earnings per share (EPS) rocketed 88%, and adjusted EPS surged 61% year over year. Wall Street expects EPS to grow 51.5% in fiscal 2019 and at an average annual rate of 17.2% over the next five years. Unless something changes significantly with NVIDIA's competitive positions, earnings should exceed that long-term estimate. Since the company's data center business blossomed a few years ago, NVIDIA has consistently trounced analyst estimates.

A growth company on track to rule the world

While Amazon is massive, it still has plenty of growth opportunities. Despite growing fast, e-commerce only accounted for 10.2% of retail sales worldwide and 9.7% of those in the U.S. in 2017, according to Statista. As the global e-commerce leader, Amazon is well positioned to continue to capture an outsize share of industry growth. The fact its international business accounted for just 31% of its e-commerce revenue in the second quarter suggests there's huge potential abroad. 

Amazon's key competitive advantages in its e-commerce business are its vast network of fulfillment centers, which enable the company's speedy delivery, and its Prime loyalty program. Customers love Prime because they get free two-day delivery (and, in some markets, even faster delivery) and other freebies, most notably access to the company's video-streaming library. Prime has proven to be a boon to Amazon because subscribers spend considerably more money per year on Amazon's online site than do non-subscribers. 

While online retailing contributes the bulk of the company's revenue, its cloud-computing service business is its profit engine. In the second quarter of 2018, Amazon Web Services (AWS) sales soared 49% to $6.1 billion, contributing 12% of the company's total revenue, but 55% of operating income. Amazon commanded a 34% share of the global cloud-service market in the second quarter -- more than twice the approximate 13% share held by the No. 2 player, Microsoft, according to Synergy Research Group. This estimated $16 billion market grew at a 44% pace overall in 2017, according to Synergy, and should continue to provide a tailwind for AWS.

Packages moving on conveyor belts in an Amazon fulfillment center.

Image source: Getty Images.

Amazon continues to enter new frontiers. In 2017, it entered the brick-and-mortar grocery retailing market when it scooped up Whole Foods, and announced in early 2018 its plan to enter the healthcare market by teaming with Berkshire Hathaway and JPMorgan Chase to form a healthcare company for their employees in the U.S. It also continues to push into the burgeoning smart-home space. Among other moves, it's expanding its industry-leading Echo line of home smart speakers, which incorporates its voice-activated, AI-powered assistant Alexa.   

In the second quarter of 2018, Amazon's net sales jumped 39% and EPS soared 1,168% year over year, crushing Wall Street's estimates. The Street has been terrible at predicting Amazon's earnings growth, so investors shouldn't pay heed to its long-term growth projections. Amazon stock continues to sport a super-lofty valuation, making it best suited for long-term investors who have higher risk tolerances and supreme belief in CEO Jeff Bezos' ability to keep the growth party going. 

A leading, dividend-paying water utility stock

American Water Works is a good choice for investors looking for a low-risk stock that offers a dependable dividend that should continue to increase, along with solid total capital appreciation potential. The current dividend yield is 2.05%, but this modest yield hides the fact that the company continues to raise the dividend quite robustly; it hiked it 9.6% in early 2018. Since the company went public in April 2008, the stock has returned nearly triple the broader market -- and with less volatility -- and has also outperformed some popular tech stocks, such as Microsoft. 

American Water is the biggest publicly traded water and wastewater utility in the U.S. It operates as a regulated utility in 16 U.S. states, though it has a presence in a total of 47 states and one Canadian province. Its market-based businesses include building and operating systems for military bases and supplying water to natural gas exploration and production companies in the Appalachian Basin. Select water utilities make solid investments because they supply a product and service that are guaranteed to be in demand forever. Their revenue streams tend to be dependable because their core businesses are regulated monopolies. Among water utilities in the U.S., American Water's industry-leading size and geographic diversity provide it with an advantage in acquiring small utilities in what's a very fragmented industry.

In 2017, American Water's revenue jumped 17% year over year to $3.36 billion, and adjusted EPS increased 6.7% to $3.03. Management remains confident in the company's ability to continue to grow earnings at an average annual rate of 7% to 10% through 2020. Wall Street expects EPS to grow at an average rate of 8.1% per year over the next five years, which is quite strong growth for a water utility.

A word regarding rising interest ratesUtility stocks often come under pressure in rising interest rate environments -- and we're in one now. At such times, income-oriented investors have greater investment choices because bond yields are higher, so some money flows away from dividend-paying stocks. Moreover, utilities' borrowing costs go up, which can eat into their profits. Like most utilities, American Water borrows significantly to fund its infrastructure upgrades and growth. That said, the company's regulated business generates consistent and predictable revenue streams, which should enable it to continue to adequately service its debt. When interest rates are rising, it becomes even more critical for investors in interest rate-sensitive stocks to dollar-cost average (invest the same dollar amount at set time intervals) into their full position over time. 

A play on the growth of the middle class in China and India

A.O. Smith was a gem of a stock that was getting extremely little coverage when I first wrote about it nearly five years ago, and it remains a rather overlooked jewel today. Over the five-year period through Aug. 28, 2018, the stock of the water-technology specialist has outperformed the broader market by nearly two times, achieving a higher return than the shares of many solid performers, including Google parent company Alphabet

Hot water coming out of a faucet and generating steam.

Image source: Getty Images.

A.O. Smith's main business is manufacturing residential and commercial water heaters and boilers, though it also has a small consumer-focused water-purification business across its markets and a small air-purification business in China. The Milwaukee-based company is the market-share leader in the U.S. for both residential and commercial water heaters. Its core North America business generates the bigger profit margins, while China has been its growth engine. More recently, A.O. Smith entered the market in India. China and India are the world's No. 1 and No. 2 most populous countries, respectively, and their middle classes are surging. Many of these people are buying water heaters for the first time.

In the second quarter of 2018, A.O. Smith's sales increased 13% and EPS grew 25% year over year. For full-year 2018, the company expects sales growth between 9.5% and 10%, and adjusted EPS growth of 20%. Wall Street projects earnings to grow at an average of 11.3% annually over the next five years. This is a well-run company with a large stash of cash and a management ready to pounce on strategic acquisitions, so I think it could exceed Wall Street's long-term growth expectations. 

As a bonus, A.O. Smith stock pays a dividend, which is now yielding 1.23%. In recent years, the company has been significantly increasing the payout. Earlier in 2018, it announced a 29% dividend hike.

Something to consider in 2018: Rising interest rates

In December 2015, the Federal Reserve increased rates for the first time in nearly a decade, and has since raised them several more times. Economists widely predict that more rate hikes are on the horizon, given the strength of the U.S. economy. Investors who are focused on the long term generally don't need to pay too much attention to the direction of interest rates, as they're guaranteed to rise and fall. However, it's beneficial for investors in sectors that are particularly sensitive to changes in interest rates to have a solid sense of the rate situation. Financials are one such sector.

Rising rates tend to act as a tailwind for some types of financial stocks, and as a headwind for others. Banks, for instance, tend to get a lift when rates are increasing because they're able to charge their customers higher rates to borrow money. Credit card and related companies tend to benefit for similar reasons. Some solid stocks you might explore in this realm include Visa, Mastercard, and PayPal. On the other hand, real estate investment trusts (REITs) tend to be under pressure when rates are rising for the same reasons mentioned in the American Water discussion: Their cost to borrow money to fund growth goes up, and some money flows away from dividend-paying stocks and into competing investments. 

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Beth McKenna owns shares of Nvidia. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Mastercard, Nvidia, and PayPal Holdings. The Motley Fool owns shares of Visa. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.