Investors trying to find those portfolio-transforming stocks tend to look for the ones that are going to generate incredible returns in relatively short amounts of time. Not many think that selling something as simple as burgers and fries for several decades at a time could be a great investment, but they probably haven't looked at a long term stock chart for McDonald's (MCD 3.24%). Not much changes with the fast food chain, but the company has produced incredible returns over the long run.
In the spirit of McDonald's business and its long term stock growth, we asked three of our contributing investors to each come up with a stock they see as having a great chance of long term success. Here's why they picked Ferrari (RACE 1.79%), Coherus Biosciences (CHRS 5.66%), and A.O. Smith (AOS 2.77%).
Image source: Getty Images.
This company is nothing like McDonald's, but its stock could be
John Rosevear (Ferrari): You'd have to look pretty hard to find a company that's less like McDonald's than fabled Italian supercar maker Ferrari. But I think it's possible that Ferrari's stock could follow the path set by the Golden Arches' stock.
As investments go, Ferrari is unusual. For starters, it's a 70-year-old company that only went public in late 2015, when Fiat Chrysler Automobiles (FCAU +0.00%) sold off its majority stake. For another thing, it's a company that limits its annual production to preserve the exclusivity of its brand -- but it still has significant profit-growth potential.
Ferrari's stock has been on a tear for about a year and a half now, because the company has a lot going for it at the moment:
- Ferrari's EBIT margin in the second quarter was 21.9%. That's not only huge for an automaker, it's pretty fat for a luxury-goods maker, too. But it's business as usual for Ferrari. Simply put, Ferraris are coveted, and the company ensures that demand always exceeds supply. That, in turn, ensures high prices and big margins.
- With ordinary automakers, we worry a lot about disruption from Silicon Valley upstarts making electric vehicles and self-driving systems. But nobody (OK, almost nobody) buys a Ferrari just for transportation. If anything, once self-driving vehicles are ordinary, there could be more well-heeled folks interested in owning something like a Ferrari.
- As I mentioned above, Ferrari has a growth plan. CEO Sergio Marchionne thinks that it can increase production somewhat without compromising exclusivity. (This is nothing like a move downmarket: Think in terms of an increase from 8,000 cars a year to maybe 10,000 or 11,000.) Marchionne also plans to produce more super-high-profit limited editions (super-fast Ferraris with seven-figure price tags), carefully license the Ferrari brand to makers of other high-end luxury goods, and offer more parts and services to owners of classic Ferraris. All of that should generate significant bottom-line growth over the next few years.
The caveat here is that Ferrari's stock is already quite expensive, at about 33 times its expected 2017 earnings. That's an outrageous valuation for an automaker. But Ferrari is really more of a luxury-goods company, one that lacks the brick-and-mortar commitments that have weighed down other luxury brands -- and one that has a surprisingly good chance for profit growth at age 70.
A pure-play on a booming market
Brian Feroldi (Coherus Biosciences): One reason why prescription drug prices are so high is that biologic drugs -- which are drugs produced inside living organisms -- have historically never had to face generic competition once they lose patent protection. That allows biologic drug makers to rake in huge profits on their legacy products for a far longer period of time than they otherwise should.
Thankfully, this situation is poised to change in the coming years now that the FDA is approving biosimilar drugs for sale. In fact, the market for biosimilar drugs -- which are copycat versions of biologic drugs -- is expected to grow substantially in the years ahead, from $1 billion in 2013 to as much as $20 billion by 2020.
What's the smart way for investors to profit from this booming market? My preferred choice is Coherus Biosciences. Coherus is a clinical-stage biotech that is exclusively focused on the producing biosimilar drug candidates. The company currently has three drugs in late-stage development that are copy-cat versions of a few of the best selling drugs in the world (Neulasta, Enbrel, and Humira).
Unfortunately, Coherus was recently dealt a huge blow when the FDA failed to approve its Neulasta biosimilar candidate earlier this year. Thankfully, the rejecting was related to manufacturing issues, so the problem appears to be fixable. In fact, management recently stated that it expects to resubmit the drug by the end of the year.
Looking ahead, Coherus' investors have multiple catalysts to look forward to. All three of its drug candidates should be in U.S. and European regulators' hands before the end of 2018. News of regulatory success with any of them would likely lead to some serious share price appreciation.
Zooming out to the big picture, a report by Marker and Markets estimates that $100 billion worth of biologic drugs will lose patent protection between now and 2020. If Coherus can ultimately perfect its biosimilar drug development technology then its investors could be poised to reap substantial financial rewards in the years ahead.
Completely different business, similar results
Tyler Crowe (A.O. Smith): French fries and water heaters have absolutely nothing in common, but the things that McDonald's and A.O. Smith have done with those respective products is strikingly similar. Both have translated those two products into high return businesses that, over time, have translated into fantastic wealth building machines.
MCD Total Return Price data by YCharts.
A.O. Smith's business of selling water heaters is one of those things that doesn't garner a lot of investor attention, but it is one of those essential items that lead to reoccurring sales. More than 80% of the company's sales in North America are replacements of existing equipment. When your hot water heater goes on the fritz, you aren't going to put off buying another one. This gives the company a surprisingly steady revenue stream in North America that it can leverage to expand its operations internationally while rewarding shareholders with a growing dividend and reduction in share count.
Unlike McDonald's that is facing the headwinds of people desiring healthier options, A.O. Smith has the wind in its sails. The company has established the leading market share in China already for water heaters and is finding incredible customer demand for its new offerings of household water and air purification equipment. With incredible growth rates in China -- and a similar track emerging in India -- A.O. Smith has an incredible opportunity over the next several years supplying an essential product for the middle-class lifestyle. If the company can turn these markets into high return machines similar to North America, then this incredible growth story could continue for decades.
