If you're increasingly feeling a less active approach to investing would be better for your bottom line, you're not crazy. Although the unusual circumstances of the past couple of years have converted many buy-and-hold investors into speculators, recent volatility has reminded them you just can't predict short-term swings. Picking quality companies and just leaving them alone is looking like a very smart idea again.
With that as the backdrop, here's a closer look at three stocks likely to outperform their peers -- and perhaps the market itself -- thanks to superior products, brilliant business models, or both. The only catch? In all three of these particular cases, "later" means years down the road, after you've given these stocks plenty of time to push through any marketwide turbulence or predictable cyclical headwinds.
1. Microsoft
Now 47 years old and facing solid competition on nearly every front it operates a business, it would be easy to assume Microsoft's (MSFT 1.82%) best days are behind it. And perhaps its highest-growth days are in the past.
Dismissing the company as a growth investment, however, is a mistake for one overarching reason. That is, it's still a leading name in all of its key markets yet has updated its business model to reflect the way consumers and corporations do business in the modern marketplace.
Microsoft is, of course, the name behind the Windows operating system, which first launched all the way back in 1985 and has been continually updated ever since. While competitors have had plenty of time to come up with a way of displacing Microsoft as the go-to interface with personal computers, Global Stats says Windows is still the operating system installed on three-fourths of the world's PCs and laptops.
Microsoft isn't just leaning on Windows, though. It's ventured into cloud computing architecture as well. And, led by its Azure cloud computing software, Canalys estimates the company is now the world's second-biggest cloud infrastructure supplier, boasting 40% year-over-year growth that outpaced Amazon's cloud computing growth during the second quarter of this year.
Microsoft also owns the Xbox video game console, the Office suite of productivity software (Excel, Powerpoint, Word, etc.), search engine Bing, LinkedIn, and a bunch of other offerings aimed at businesses rather than consumers. As long as the world relies on computers and the cloud, it's going to rely heavily on Microsoft to keep it connected.
The kicker: Much of Microsoft's revenue is now subscription-based, meaning customers pay a monthly fee for ongoing online access to software that's perpetually updated. This makes the company's cash flow very, very predictable.
2. Dollar General
There's no denying that powerhouse Walmart rattled the retailing world when it started a rapid expansion back in the '90s. Consumers loved the fact that they could get nearly everything they could reasonably want at a nearby Walmart store at a price that couldn't be beat.
The premise is slowly but surely losing its appeal, though. Not only are sprawling Walmart stores increasingly annoying to shop, but they may also be increasingly inconvenient to get to.
Enter Dollar General (DG -0.41%), the un-Walmart. At an average size of only around 8,000 square feet, Dollar General stores are easy to get in and out of quickly. They're also just easy to get to. The company reports that three-fourths of U.S. residents now live within five miles of one of its 18,000-plus stores, making them much more accessible than the nearest Walmart.
And while it's true that Dollar General stores can't offer everything much bigger stores can, the retailer has made a point of carrying more of what consumers want and need. An initiative called DG Fresh is adding more and more groceries to stores' assortments all the time, for example, with more than 2,300 locations now offering fresh produce. By the end of the year, the figure should exceed 3,000.
And that's just a sampling of the company's initiatives that will drive future growth in an environment that increasingly values convenience. It's also pushing deeper into the healthcare business and continues to expand its popshelf store concept aimed at more affluent, urban markets.
3. Mastercard
Finally, add credit card company Mastercard (MA 0.07%) to your list of stocks that could pay off big-time if given enough time.
With nothing more than a passing glance at the global economy, it would be easy to assume consumers are starting to tighten their purse strings. And perhaps, in some ways, some of them are. By and large, though, consumers' credit card usage and the economy aren't as tightly tethered as you might think. While Mastercard's top line slumped in 2020 in the throes of the COVID-19 pandemic, that weakness reflected an inability to charge for goods and services rather than an unwillingness to do so. If you go back to 2008, the recession prompted by the fallout of the subprime mortgage meltdown had very little adverse impact on Mastercard's top line or bottom line, both of which reached record levels during the first half of this year despite the specter of rising interest rates and an economic slowdown.
Read between the lines: People love to spend and certainly don't mind charging for goods and services even when they know they should probably rein in their outlays. To this end, analysts are still calling for revenue growth of nearly 18% this year and another 16% next year, with earnings expected to improve even more.
Mastercard CEO Michael Miebach tried to curb investors' surge-sparking lofty expectations after the company reported earnings of $2.56 per share for its second quarter, up 40% on a currency-adjusted basis and topping estimates of $2.35 in the process. He specifically pointed to inflation as a stumbling block for a certain portion of the card company's customers.
Given consumers' historic (and easily rekindled) love affair with credit cards, though, there's no reason to suspect this company won't be able to turn ever-increasing demand for credit into ever-increasing revenue and earnings.
