There's a time and a place in every portfolio for high-flying growth stocks, but most of last year's darlings have been taking it on the chin all summer. Trying to anticipate a price zig will probably get you burned by a zag, and a long-term investor shouldn't be concerned with day-to-day volatility. Back away from the ticker and let's take a look at some companies built for the long road ahead, including one whose prospects are so strong that you might one day be giving some shares to your grandchildren.
Long-term thinking through short-term movements
The Dow (INDEX: ^DJI) is still down from its peak in early May, and where it will end up in December is anyone's guess. Every company on this list has beaten the broader benchmark over that time, as they have over the last 12 wild months. The past can only guide us to the future, but if this past is any indication, your financial future would be fairly safe with these companies.
10-Year Average Annual Return
5-Year Forward Growth Estimates
|McDonald's (NYSE: MCD )||14.6%||3.1%||10%||18.1|
|Altria (NYSE: MO )||15.3%||5.9%||8%||16.9|
|Diageo (NYSE: DEO )||11.2%||4%||10.7%||16.8|
|Intel (Nasdaq: INTC )||1.4%||3.6%||11%||10.8|
|Philip Morris International (NYSE: PM )||21.5%*||4.6%||12.7%||15.4|
|Costco (Nasdaq: COST )||8.9%||1.2%||13.3%||24.9|
Source: Yahoo! Finance. *Three-year average annual return.
All offer solid growth rates, good forward momentum, and good yields. Measuring a company's ability to endure over the years is difficult and subjective, and in this case I had to do a little projecting. How well can McDonald's protect its business against the Chipotles and Five Guys of the fast-food world? How safe is Philip Morris from a lawsuit in, say, Argentina or South Korea? Let's take a closer look.
McDonald's had at least 33,000 stores in over 100 countries before the 2007 recession, and that number has certainly climbed as the world economy has rebounded. A willingness to adapt and a world-class supply chain have kept McDonald's on top of its industry. The biggest threat to McDonald's might not be a bad economy, but a good one. Chipotle and Five Guys are more upscale options, and as this type of restaurant flourishes, it could cut into the growth of the Golden Arches. Still, Mickey D has kept its dividend growing through the depths of the recession, which is a great sign for perma-bears.
Diageo is somewhat a McDonald's of spirits, and it has a similar global reach. Fool contributor John Grgurich makes a compelling case for the stock, and it's hard to argue against him. Like fellow sin stocks Altria and Philip Morris, Diageo serves a market that's not going anywhere. One knock against it might be its flat earnings over the past five years. Analysts expect much better growth for the next five years, but those wacky analysts usually shoot for the moon, don't they?
Rise of the machines
Intel's come a long way from the dot-com boom, and it's one of the few survivors still making big gains as computers become more omnipresent. The company's on pace to double its revenue from a decade ago, and its net income has grown almost tenfold in the same time period. Despite this continued dominance, the market's given Intel a P/E that's close to scraping the single digits, practically leaving this major high-tech player for dead. The world won't stop needing computers, and Intel won't stop being among the world's largest microchip manufacturers any time soon. Intel's R&D budget has been larger than competitor AMD's entire yearly revenue for quite a few of the last 10 years. Still, unexpected breakthroughs from a competitor could blow a hole in Intel's moat. Nothing is a sure thing in high-tech.
Big stores with big potential
What about Costco? There aren't many companies that engender the fawning loyalty granted this big-box discounter. It's grown from 206 locations in 1993 (the time of its merger with Price Club) to 592 warehouses around the world today. That leaves room for tremendous growth in the future, which befits its high P/E relative to its peers on the list. Although its membership costs recently nudged higher, that shouldn't negatively impact its prospects. The high P/E could be its biggest drawback -- witness Walmart's stock price struggles over the last decade, in spite of steadily increasing earnings.
The two sides of sin stocks
Philip Morris and Altria are two sides of the same coin, but each side's engraving reveals different prospects. Altria's stuck with America, where the demographics of the tobacco market are less favorable. The Centers for Disease Control and Prevention found that adults ages 18 to 44 (Generations X, Y, and the Millennials) were less likely to have ever smoked than adults 45 and older, but older adults were less likely to be current smokers. The balance between lower smoking rates and steady population increases means that Altria might expect to do little better than tread water in the future.
One for a lifetime
Philip Morris, on the other hand, has plenty of room to run. Dan Dzombak picked up shares for his Rising Star portfolio, and Jim Royal tabbed it for the world's best dividend portfolio. Dan mentions that Philip Morris has seven of the world's top 15 tobacco brands, but has only a 27% market share in its foreign markets. Despite that, it's still sporting superior margins. Doubling its market share would probably be optimistic, but it's a big world, and you've got the rest of your life to watch the company grow. When it comes down to long-term potential, this international powerhouse is the one to choose.
I'd welcome your thoughts on this selection, so let me know if I picked the right company, or if there's a better opportunity I'm overlooking.
There are some great values in this group, but The Motley Fool has some other ideas up its sleeve. Find out more about the five stocks the Fool owns that you should be looking at today -- they're all included in this free report.