Legendary investor Warren Buffett once opined that "time is the friend of the wonderful company, the enemy of the mediocre," referring to his preference for buying wonderful businesses, even at slightly higher prices, and holding them for the long haul. Taking the long view is precisely why Warren Buffett is one of the greatest investors on earth.
Below, three Fools lay the case for Meritage Homes Corp (NYSE:MTH), Stanley Black & Decker (NYSE:SWK), and Mastercard (NYSE:MA) as businesses you can confidently buy, hold, and reap the rewards for years to come.
A surprising trend you can profit from
Jason Hall (Meritage Homes Corp): With the housing crisis almost a decade behind us, new home construction has remained relatively slow. And while this was due in part to a glut of inventory that took years for the market to absorb, young people have bought houses at a slower rate than prior generations, further weighing on homebuilders in recent years.
But it's looking like that trend is starting to change, as millennials -- millions of whom entered the work world in the middle of the worst recession in nearly a century -- are finally starting to become homeowners. According to the National Association of Realtors, first-time homebuyers made up 35% of the market in 2016, with 60% of those aged 35 and under. While still below the long-term average of 40%, this was the highest percentage in several years.
Meritage is already seeing a boost from young buyers. Last quarter, the top-10 builder said building more entry-level spec homes for first-time buyers was a key factor in higher margin and profits. This is why the company is targeting first-time buyers with 70% of the communities it will build on its most recent land investments. This focus will likely accelerate in the years ahead.
That makes Meritage an ideal stock to own for the next 10 years, but what makes it worth buying now is how cheap it is, trading for only 11 times earnings.
As stable as they come
Daniel Miller (Stanley Black & Decker): Holding stocks for a decade shouldn't be the exception to the rule, but rather the typical strategy for most investors. While there are many reasons to hold a stock for 10 years -- whether it's a young growth stock needing time to turn a profit, a cyclical stock needing to wait out the ups and downs, among many reasons -- two important aspects are consistent income and growth. To the surprise of many investors, Stanley Black & Decker has an incredible dividend and still has growth prospects.
Starting with the company's dividend, management recently approved increasing its dividend by $0.05, bringing its quarterly cash dividend to $0.63 per common share, roughly a 1.7% yield. It marks the fiftieth consecutive annual dividend increase for the well-known tools brand, and if a picture is worth a thousand words, this next graph says a lot about its commitment to returning value to shareholders via the dividend.
In terms of growth, the company can continue to innovate new products to increase sales organically; in fact, during the second quarter, all of the company's business segments contributed to its 7% organic revenue growth. But the intriguing part for investors is the company's opportunities to expand by acquisition. The integration of Newell Tools and the Craftsman brand is going smoothly and will generate top- and bottom-line results for the company moving forward.
If your investing window is a decade or longer, as it should be for most investors, this is a perfect company to own, as it's committed to returning value through its stable and consistently increasing dividend, as well as growth through acquisitions.
A royalty on the economy
Jordan Wathen (Mastercard): The payments industry exhibits every characteristic of the very best businesses: A long runway for growth, compelling economics and margin, and very little required reinvestment to grow the business.
Best of all, the business sits atop an obvious trend toward electronic payments and cards replacing cash in most transactions. As e-commerce grows, Mastercard benefits. As consumers replace cash or debit cards with credit cards, Mastercard's earnings increase and its margin expand. As inflation ensures prices go up over time, Mastercard stands to generate more revenue and profit, since it collects its fee as a percentage of each transaction.
For all the complaints about fees that retailers and merchants pay to process credit cards, very little of it is because of networks like Mastercard. Mastercard generated net revenue of roughly $11 billion last year on gross dollar volume of about $4.8 trillion, effectively carving out less than 0.25% of each transaction for itself as revenue, despite playing perhaps the most important (and most difficult to replicate) role in providing the network on which payments travel from one party to another. If anything, relative to others in the value chain, Mastercard is underpaid.
For all these reasons, I think the payment networks, particularly Mastercard, are good stocks to buy, hold, and largely ignore, as the trends that have made it an incredible stock to own since its IPO are just as strong today as they were then.
Daniel Miller has no position in any of the stocks mentioned. Jason Hall owns shares of Mastercard and Meritage Homes. Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard. The Motley Fool recommends Meritage Homes. The Motley Fool has a disclosure policy.