Picking out stocks to hold on to forever is an incredibly challenging task. In doing so, you're essentially saying that this company, as it stands, won't be disrupted in one way or another for as long as you live and beyond. Considering the rapid development and adoption rate of technology nowadays, it seems that almost no industry is safe.
In my opinion, though, there are industries where it is harder to disrupt or produce a viable alternative, and the companies that have carved out a strong position in those particular industries are the ones worth hanging onto for a long time. That's why two companies I personally own and plan to hold on to forever are fertilizer manufacturer Terra Nitrogen Company (NYSE:TNH), and steel manufacturer Nucor (NYSE:NUE). Here's a quick run down on the long, long-term thesis behind these stocks.
We all gotta eat
While the delivery of food continues to change, the one thing that doesn't is the fact that we have to grow plants to meet our demand for food whether it be for our own consumption or feeding livestock. With that, let's talk a little plant stoichiometry (I saw that yawn)! Plants require several nutrients in the soil to grow. Typically, the three limiting elements in soil are nitrogen, potassium, and phosphorus. Basically, the availability of these elements will determine how much a plant will grow. That's why these elements are found in the most common fertilizers. There are organic options that can meet these demands. The nutrient content for these limiting elements, however, is low in organic fertilizers that it would take massive amounts of the stuff and would be incredibly difficult to source if we want to achieve the same effect of manufactured fertilizers.
So we need fertilizers to grow food, and in the coming years we are going to need to be able to grow a lot of it. Populations are increasing, more and more people are coming into the middle class and eating higher calorie demand foods such as meat & plant oils, and total arable land isn't keeping pace with crop demand. This means that we are going to have to grow more on less land, thus requiring more and more fertilizer.
This is what makes investing in fertilizer, and specifically Terra Nitrogen, so compelling. It's providing an essential component for human's most basic need that is going to be almost impossible to disrupt or replace. As long as we continue to eat food, we're going to need fertilizer.
From an investment standpoint, Terra Nitrogen is one of the best ways to play this trend. One is that it manufactures its nitrogen fertilizer using cheap domestic natural gas and has little transportation costs since its facility is in the middle of America's corn belt. This gives the company a huge leg up on pricing and costs. Even in 2016 where nitrogen prices were the lowest in a dozen years, Terra Nitrogen managed a net income margin of 31%. Also, the company is structured as a variable rate master limited partnership, so all available cash at the end of each quarter is paid out to investors. Thanks to zero debt and a low cost structure, it's a pretty hefty cash payment.
As long as I'm still eating food, I assume the rest of the world is doing the same. We're going to need fertilziers to grow it. For me, that will be my holding period for Terra Nitrogen.
We all gotta live somewhere
Probably the next thing that all humans need after food is the safety provided to us by basic infrastructure. Whether that's the house or apartment we live in, the vehicle and roads we use to get around, or all the behind the scenes things that we probably take for granted. Almost all of that infrastructure is built with a few basic elements: Wood, metal, plastic, cement, etc. In the case of Nucor, it's a business that is built to fulfill the need for one of those essential needs: Steel.
Steel is an essential component of our everyday lives, and will likely continue in that role for many years to come. Today, the world uses about 1,500 million tons of steel annually. Also those same trends that apply to food -- expanding population, more people moving into the global middle class -- will play a similar role in steel's growth in the coming years. According to the OECD, global steel demand will grow by 30% by 2030.
The industry is always going to go through phases of over and under capacity as it is a cyclical industry. So investing in this business is about buying the companies that can continually produce returns in the good times and bad. Nucor has several unique advantages in that regard. Most of its mills use modern electric arc technology that can be deployed on a smaller scale and can quickly be shut down or ramped up; its facilities can also use cheap domestic natural gas versus coking coal for the steel-making process; and its labor costs are much more variable than others that make the lean times easier to handle. These little things all add up to a company that has produced some of the best returns in the business and enabled management to raise its dividend every year for 44 years.
Perhaps someday we won't need steel thanks to new composite materials, but we're a long ways off from that. As long as we need steel for building out the essential infrastructure that makes modern living possible, then Nucor will be a personal holding.