5 Small Stocks for the Next Decade

A generation ago, it was absurdly expensive to buy and sell stocks. Today, it's much cheaper. But that creates a double-edged sword: With low costs, the average holding period for stocks has plummeted. That makes long-term, buy-to-hold investing -- the form that's most likely to build dynastic wealth for you and your family -- a very uncommon thing.

I start with that point because the five stocks I'm talking about today are relatively small -- none more than $9 billion in valuation -- and are likely to be volatile. At the same time, I believe that shareholders will be rewarded for their patience over the next decade with each one.

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All five of these stocks share two vital traits that I believe will make them long-term winners: widening moats, and leaders who have their skin and soul in the game. And lest you think these are empty prognostications, I own all five, and they combine to form 15% of my family's real-life stock portfolio.

Lock those customers in

In my own experience, nothing has been more predictive of investment returns than a company's sustainable competitive advantage, or "moat." In the simplest sense, a moat is what separates a company from the competition and keeps customers coming back year after year. A very special type of moat protects all five of these companies: high switching costs.

Axon Enterprises (AAXN 1.25%) was formerly known as TASER International. While it enjoys a virtual monopoly in the stun-gun business, it is its foray into body cameras that interests me. Crucially, Axon offers up a platform called Evidence.com for police departments to store and analyze their footage.

Veeva Systems (VEEV +3.58%) is the brainchild of a former salesforce.com executive who saw that pharmaceutical companies had specific cloud-based needs that weren't being met. The company's solutions started off with simple customer relationship management solutions, but with Veeva Vault, have branched into capturing mission-critical data that helps bring drugs to market.

Ellie Mae (ELLI +0.00%) offers mortgage professionals the Encompass platform. By using the platform, lenders, banks, agents, appraisers, and others have access to one another and to a streamlined process for processing mortgages and ensuring that all requisite laws are being followed.

Shopify (SHOP +2.94%) is the go-to company if you want to create an e-commerce presence for your small or medium-sized business. These days, you can't survive without e-commerce. Shopify not only offers the tools to build your website but also offers payment and logistics solutions to grease your company's wheels.

And Paycom Software (PAYC 2.00%) is disrupting the process of cutting and processing paychecks for small and medium-sized companies. Not only does it offer a seamless, paperless way to process checks, but it also covers several HR duties and helps ensure that healthcare benefits are being offered and processed according to regulations.

With all five of these companies, revenue comes in primarily on a subscription basis. That means revenue is regular and recurring. And more often than not, switching away from any one of these services is very unlikely. That's because the costs -- financial, and in terms of headaches from retraining staff and potentially losing mission-critical data -- are exorbitantly high.

The results show in the sales growth at all five organizations.

Healthy Growth Across the Board
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Ownership with skin in the game

Beyond their positive business momentum, I'm encouraged that all five companies still have their founders running things in one capacity or another. Founders often view their creations as an existential part of themselves and are thus motivated to create something with enduring value.

They all, also, have a relatively significant portion of their own skin in the game, through stock ownership and voting rights.

Data source: company DEF 14A filings.

While I'd like to see higher insider ownership and voting rights at Axon and Ellie Mae, I'm still encouraged that the spirit in which all five of these companies were founded is alive and well.

Add these two simple variables together -- high switching costs, and founders with skin in the game -- and I think you have an equation for long-term stock returns. That's where my own money is, and I think you should consider doing the same.