INVESTING COMMENTARY
What Will You Regret Not Buying in 20 Years?
By Selena Maranjian
July 8, 2009
Feel like crying over missed opportunities? Check out the following returns for some stocks over the past two decades:
Company
Average Annual Return
Dell (Nasdaq: DELL)
29%
Valero Energy (NYSE: VLO)
17%
Precision Castparts (NYSE: PCP)
15%*
Nucor (NYSE: NUE)
15%
Automatic Data Processing (NYSE: ADP)
12%
Smithfield Foods (NYSE: SFD)
12%*
Chevron
12%
Southwest Airlines (NYSE: LUV)
9%
S&P 500
5%
Source: Yahoo! Finance.
*Over past 19 years.
A $5,000 investment in steel company Nucor 20 years ago would be worth nearly $70,000 today. The same investment in Dell would be worth more than $900,000! Truly, one stock canchange everything.
So, why didn't you buy them 20 years ago? Why aren't these amazing returns yours? Why isn't your portfolio home to a few millionaire-maker stocks?
What stopped you?
There are lots of reasons you might not have bought these companies 20 years ago. Maybe you weren't yet awake to the promise of the stock market. (I know I wasn't.) Maybe you didn't have money to invest, even if you wanted to. But even if you wanted to invest and had the means to do so, you probably still didn't buy these companies for your portfolio. Why?
Well, with some of them you didn't expect them to keep generating strong returns. With others, though, you probably didn't see their promise -- because you weren't imagining a future very different from the present.
You weren't appreciating that Southwest Airlines would buck the money-losing tradition of so many airlines, or that a company like Dell would make billions building computers to order. You weren't aware of how Nucor was succeeding by inventing a new steel-making business model and becoming a top national recycler.
Many of these companies succeeded in large part because they changed the status quo and broke the rules about "how things are done" along the way. Southwest, for example, chose to fly only one kind of airplane, instead of maintaining and flying many kinds.
And now -- when those innovations are apparent to even the dimmest of us -- those companies are household names. Their very ubiquity means they won't be maintaining those stratospheric growth rates going forward because now they're established. They may still serve your portfolio well, but they aren't likely to blow its doors off anymore.
Don't kick yourself
But even though these companies are well past their rule-breaking stage, there are a bunch of small, growing ones poised to do the same thing -- ones that are breaking the rules, moving first in exciting new arenas, and creating new ways of doing things. Some of them even stand a decent chance of delivering out-of-sight returns for you over the coming 20 years.
So, how can you tell the difference between the companies that will deliver those out-of-sight returns and companies that will sink, well, out of sight? Fool co-founder David Gardner looks for companies that offer "the highest possible returns" -- companies that are top dogs in important and emerging industries, and that have sustainable advantages, strong past price appreciation, good management, and more.
Take video gaming, for example, which, as an industry, has been experiencing explosive growth -- up 19% in 2008 and generating $21 billion. Both Activision Blizzard and Take-Two Interactive have been busy changing the rules of the game -- and setting new standards.
So, what will you regret not buying today?
David and his team have found, among many exciting companies, a specialist in surgical robots, a company that runs China's premier search engine, and one involved in commercial space systems. They each have some key traits in common with the powerful performers in the table above.
If you'd like to see what they're spotting today, I invite you to take advantage of a free 30-day trial of our Motley Fool Rule Breakers service, including full access to all past issues and every previous recommendation, many of which are in cutting-edge fields such as biotech, alternative energy, and nanotechnology. Click here to learn more.
So give it some thought. You might want to park a little money in some rule-breaking companies that could serve you well for a long time.
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This article was originally published March 4, 2009. It has been updated.
Longtime Fool contributor Selena Maranjian owns shares of Activision Blizzard. Take-Two Interactive Software is a Motley Fool Rule Breakers recommendation. Activision Blizzard and Precision Castparts are Stock Advisor selections. Dell is an Inside Value pick. The Motley Fool is Fools writing for Fools.
The Best Companies on Earth
By Andrew Sullivan, CFA
July 8, 2009
Let's get one thing straight: To get incredibly rich in the stock market with a buy-and-hold strategy, you need to own the best companies. There's no way around it. But how can you determine what the truly best companies are?
I'm here to tell you that there are five simple characteristics shared by every single one of the best companies on Earth. If you can identify these five traits and have the discipline to invest at the right times (and perhaps sell if things change), you'll never have to worry about money again.
The fab five
Without further ado, the five traits are:
It sounds like a basic list, but when you come down to it, businessisbasic -- the production of a good or service for a customer. The quality of a company depends on how useful its product is, how defendable its markets are, and how fast it can produce new and better products. Solid management and cost-effectiveness are musts as well.
The fab five, one by one
Let's examine each trait and look at some examples.
"Creation of high utility for customers" means producing a good or service that customers value very highly, or literally can't live without. A perfect example isRockwell Collins , which produces navigation and landing guidance systems for airplanes. I don't know about you, but I'd say any piece of equipment that allows a plane to land createsalotof valuefor airlines and passengers.Another one closer to home is McCormick (NYSE: MKC), the spice maker that millions of cooks rely on to flavor their meals.
Contrast this with footwear and apparel providerslike Deckers Outdoor (Nasdaq:DECK)or American Eagle Outfitters (NYSE:AEO)that face oodles of competition for the customer's retail dollar, and you'll start to see what I mean.Creation of unique value typically leads to repeat purchases.
"Something special" is intentionally broad because this trait comes in many forms. The company needs this little bit extra to maintain its advantage and inhibit competition. It could be a patent, a secret formula like that ofFortune Brands '(NYSE: FO) Jim Beam whiskey, or a valuable network, where more advantages flow to the company the bigger the network gets. A special manufacturing process or distribution network that allows a company to be the lowest cost provider could be a significant advantage. For example, cutting out the middleman gives Geico a low-cost advantage in providing car and other vehicle insurance that's tough for competitorsto match.
"High rate of innovation" relates to how a business must constantly improve to stay ahead of its rivals. The technology sector is full of fast-paced innovation, and staying ahead of the curve isn't easy. An excellent example isthe now-ubiquitous iPod. I recently dug my first iPod out of a box and was amazed at how clunky it is. Plus, it only has 10 gigabytes, whereas the new models have 120 gigabytes -- 12 times as much, and, I'm embarrassed to say, more than my home laptop. Almost all businesses have to innovate to survive and grow, so an ability to do this effectively, as with the iPod, or even in the case of Procter & Gamble (NYSE: PG) in home supplies, is crucial.
"Excellent managers" is self-explanatory. A company is only as good as its assets and the people using them.General Electric is a great example; it spends an estimated $800 million every year on educating its employees and managers. As a result, GE enjoys dominant market positions and boasts highly regarded managers, who rank among the most sought-after executives to lead other companies. Others, like the leadership at truck-maker Paccar (NYSE: PCAR), are noted for both their managerial prowess as well as their capital allocation skills and are immensely valuable to shareholders of that company.
Finally, the company needs to"operate efficiently." This enables the business to earn enough money to focus on the first three traits. The pioneer of efficient manufacturing is Toyota , which was the early adopter of lean manufacturing andkaizentechniques. Other companies like Cemex (NYSE: CX) have devised indigenous techniques like state of the art fleet management to lower costs to provide local advantages within their competitive regions.
Start investing
That's it. The five characteristics of each truly brilliant business on this planet. They are self-evident, yet ever so difficult to obtain and hold.
I encourage you to think about every company in this light. How much value does it really create for the customer? Can it do something no one else can do? Is it well-managed? These questions are simple, but the implications are very deep, and if you can check off even four out of five boxes, you'll likely have a winner on your hands.
This is all we do atMotley Fool Inside Value-- focus on identifying companies with these characteristics, and pick our spots to invest in them. We're extremely pleased that many of the world's best businesses are on sale now.
Good luck investing! If you need help, consider taking a 30-day guest pass toInside Value. You'll get all of our recommendations, including our five best ideas for new money now, as well as a discounted cash flow calculator you can use to evaluate companies on your own. Click hereto get started.
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This article was first published March 1, 2009. It has been updated.
Fool analystAndrew Sullivanowns Cemex sharesbut has no financial position in any other of the stocks mentioned in this article. Rockwell Collins is aMotley Fool Inside Valuepick.Cemex, Fortune Brands, and Paccar are Stock Advisor selections. McCormick and Procter & Gamble are Income Investor selections. Cemex is a Global Gains recommendation. The Motley Fool owns shares of Procter & Gamble and Cemex and has adisclosure policy.
Stocks With Room to Run
By Todd Wenning
July 8, 2009
The "Rule of 72" is a great way to calculate compounding interest in your head. To find the number of years it would take a figure to double, simply divide the number 72 by the assumed growth rate. For example, if you think your stock will grow at a rate of 7.2% per year, it will take roughly 10 years for it to double (72 / 7.2 = 10).
If that 7.2% long-term equity growth rate seems too slow, consider that the Vanguard Total Bond Market Index (VBMFX) returned about 5.7% per year on average over the past 10 years, while the S&P 500 has had an annualized return of negative 2% over that same time period.
It's been a disappointing decade, to be sure, and many notable companies not only underperformed the bond market, but also posted negative 10-year returns.
Of the 500 companies currently in the S&P 500, 167 -- 33% -- have failed to break even since July 1999. Some of those dreary investments include:
Company
Trailing 10-Year Annualized Return
Cisco Systems (Nasdaq: CSCO)
(5.6%)
Yahoo! (Nasdaq: YHOO)
(9.8%)
Coca-Cola (NYSE: KO)
(0.4%)
Makes you want to take a closer look at your index fund, doesn't it?
Lean on me
The good news? For each of the aforementioned underperforming large caps, there were 129 current S&P 500 members that more than doubled and held the fort over the past decade. Without these companies, the index may have fared even worse than it did. This list includes:
Company
Trailing 10-Year Annualized Return
Nike (NYSE: NKE)
8.0%
Goldman Sachs (NYSE: GS)
8.9%
Starbucks (Nasdaq: SBUX)
7.3%
Now we're talking. This is the kind of growth you expect to see from your stocks. This is why you take the extra risk by investing in stocks instead of Treasuries or CDs.
But is the best good enough?
Yet these were among the best-performing megacaps of the past 10 years, and I consider a 15% annualized return to be about the most any megacap investor can hope for over the long run. Why? Simply put: The Law of Diminishing Returns.
As it becomes big, a company's growth begins to plateau. Microsoft (NYSE: MSFT), after all, was once a tremendous growth stock -- averaging greater than 90% annual returns from 1986 to 2000 -- before it got so big that it became difficult for its growth efforts to drive the bottom line.
Furthermore, according to Professor Jeremy Siegel's research, only 11 S&P stocks were able to sustain more than 14.7% annual returns from 1957 to 2003, even after we include dividend reinvestment! As companies mature, your returns diminish.
You can do better
Small-cap stocks, on the other hand, have much more room to grow than their larger counterparts. For instance, Hansen Natural has gained over 4,900% since March 1999, when it was just a $36 million company. Indeed, all of the market's 10 best stocks of the past 10 years were small caps.
This isn't to say you should scrap your large caps -- diversification is important -- but if you're looking for a few great growth stocks to add to your portfolio, you might want to consider a small company instead of an S&P giant.
The Motley Fool Hidden Gems team is always on the lookout for small-cap stocks that deserve your investing dollars. Their methodology looks at several factors -- including a strong balance sheet, a wide market opportunity, and solid leadership -- to identify promising small companies.
If you'd like to put some potential-laden stocks to work in your portfolio and view all of the team's picks, click here to join Hidden Gems free for 30 days.
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This article was originally published Oct. 20, 2006. It has been updated.
At the time of publication, Todd Wenning owned shares of Home Depot, but of no other company mentioned. Starbucks, Microsoft, and Coca-Cola are Motley Fool Inside Value recommendations. Coca-Cola is an Income Investor choice. Hansen Natural is a Rule Breakers pick. Starbucks is a Stock Advisor selection. The Motley Fool owns shares of Starbucks. The Fool is investors writing for investors.
You Missed the Best Day to Buy
By Rex Moore
July 8, 2009
There was once awoman who prayed every day for 20 years that she'd win the lottery. Every single day. Finally, in despair, she said, "God, I've been a true and faithful servant and have lived an exemplary life. Why won't you grant me this one thing?"
"Look," said God, "at least meet me half way --and buy a lottery ticket."
Buy the ticket
Similarly, in order to take advantage of the greatest long-term wealth-building machine available to us individual investors, you have to be in the market. And if the current craziness is keeping you away because you fear a huge drop, you're ignoring the advice of some of history's top investors.
In the latest edition of his book Stocks for the Long Run, Jeremy Siegel charted returns for a hypothetical unlucky investor who happened to invest at the absolute top of six major 20th-century market peaks. After 30 years, this investor actually accumulated four times more wealth in stocks than he would have in bonds, and five times more than in T-bills. For a 20-year period, he doubled the return for bonds.
There's more where that came from
Consider John Templeton, founder of Templeton Growth Fund and widely regarded as one of the best investors of his generation. His advice about getting into the market is simple: "The best time to invest is when you have money. This is because history suggests it is not timing which matters, it is time."
Our own David and Tom Gardner, who've beaten the market by a tremendous amount in Motley Fool Stock Advisor, also eschew timing the market. "The best time to invest was yesterday," says Tom. "The next best time is today."
So, even though the tongue-in-cheek title of this article implies you've missed your best chance, you can see that you really haven't. If you've got money you won't need for five years or more, just get in the game as soon as you can.
Still need convincing? I looked back a decade, specifically searching for companies that had been up 25% or more in one year. Surely, many investors back then were worried that stocks were too rich and ready for a great fall.
Well, a gnarly bear market did start up a couple of years later, and yes, these stocks fell. And yet despite their large prior one-year gains, and despite two big bear markets (including the current one), their returns have been solid for those who held for the long term -- especially when compared to a market that has lost 36% in the meantime.
Company
July 7, 1998 to July 7, 1999
July 7, 1999 to July 7, 2009
Apple (Nasdaq: AAPL)
64%
1,012%
Oracle (Nasdaq: ORCL)
154%
114%
PPL Corp. (NYSE: PPL)
43%
105%
United Technologies (NYSE: UTX)
48%
45%
Express Scripts (Nasdaq: ESRX)
68%
675%
Union Pacific (NYSE: UNP)
39%
74%
Yum! Brands (NYSE: YUM)
67%
155%
S&P 500
21%
-36%
There are no guarantees
Many companies from that time have not returned to their all-time highs of 2000, but history shows that if you can find superior businesses with good management, hold for the long haul, and add new money regularly, you will rarely be disappointed.
That's the advice David and Tom give to their Stock Advisor members, and they help them with not only new recommendations each month but also the top five stocks to buy right now. They've been at it a long time, through bear and bull, and their average recommendation is beating the market by 40 percentage points.
Right now, a special no-obligation free trial will give you access to all these stocks and more. Here's more information.
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This article was first published Jan. 25, 2008. It has been updated.
Rex Moore is a Fool analyst and thinks now is a good time to buy stocks. He owns no shares of the companies mentioned. Apple is a Motley Fool Stock Advisor pick. This information is brought to you by the Fool's disclosure policy.