Buy-and-hold investing is the best kind of investing. Why? It allows you to enjoy the power of compound interest, ignore the short-termism that pollutes most discussions about stocks, and, perhaps most importantly, sleep soundly at night.
While the best holding period might be forever, that's difficult to wrap your head around. So, if you wanted to find stocks to safely buy and hold for the next decade, regardless of market pullbacks and national policies, then you'd probably look for businesses supported by reliable long-term trends. That's why I think any portfolio could own Kinder Morgan (KMI -0.12%), Codexis (CDXS -10.36%), and Cheniere Energy (LNG -0.19%) for the next 10 years or more.
Energy independence is great for this fee-based business
Here's an eye-opening calculation: Add up all of the crude oil, natural gas, and natural gas liquids production from the three countries that call North America home, subtract their total consumption, and you're left with an undeniable reality that the continent is oh-so-close to being energy independent. If you factor in estimated growth in energy production over the next several years, then energy independence becomes a slam dunk. In fact, production will greatly exceed consumption, meaning the continent will become one of the biggest energy exporting regions on the planet -- and virtually overnight.
That long-term trend is amazing news for energy infrastructure companies such as Kinder Morgan, which owns the largest pipeline network in North America. That includes major pipelines in the largest American shale energy plays, the only pipeline extending to Canada's West Coast (where export terminals are being built), and pipelines that touch all three of the continent's major bodies of water. The network moves carbon dioxide (an important industrial input), natural gas, crude oil, and various other liquids and condensates for use in heating homes, feedstocks for refineries, and raw and finished product exports.
Kinder Morgan's fee-based business model generates substantial cash flow and profits. That will grow considerably as energy production ramps up in the next decade by increasing the throughput of products traveling in its pipelines. That bodes well for growing the dividend to historical levels and beyond. Indeed, the company is poised to return to growth mode in 2018, but it figures to remain there for years to come. Assuming management doesn't fumble the opportunity, this is a great chance to directly own part of a sweeping disruption to global energy flows.
A small-cap stock with big growth potential
Codexis' business model may have turned a corner in 2017. The incredible gains in product revenue through the first nine months of the year -- up 73% from the year-ago period -- a hint that the technology platform is finally gaining sufficient market traction to warrant a long-term investment.
The company has built a leading platform for modeling, designing, building, and testing iterative changes to the chemical structure of enzymes, which are used to significantly improve the manufacturing of chemicals, detect the presence of biomarkers, and even serve as biotherapeutics. Codexis cut its teeth and optimized its platform over the years by focusing on simplifying the manufacturing of small-molecule drugs for pharmaceutical customers -- and won three Presidential Green Chemistry Awards from the U.S. EPA in the process.
Supplying the pharma industry remains a core focus of the platform today, with 15 of the top 20 global companies as customers, but numerous growth opportunities are now within reach. The company has expanded into food ingredient manufacturing with Tate & Lyle, announced it will begin clinical trials for its own biotherapeutic drug candidate in 2018 with Nestle Health and is quietly building a portfolio of enzymes for use in diagnostic tests that may negate the need for invasive tissue biopsies.
The technically complex niche promises to turn Codexis into a lucrative growth stock in the next decade. The company will deliver an estimated $25 million to $27 million in product revenue in 2017, up from just $15.3 million in 2016, and at least $50 million in total revenue. Better yet, product gross margin is expected to grow to at least 40% in 2017 -- the third consecutive year of improvement -- up markedly from just 14.7% in 2012.
The growth achieved is even more remarkable when you consider that the expansions in food ingredients and diagnostics are still too early to contribute meaningful revenue and that significant revenue sources from 2016 collapsed due to customer product changes. Simply put, Codexis is a great small-cap stock to own for the long haul.
The best play in American energy exports?
Kinder Morgan isn't the only stock to buy and hold for investors looking to directly benefit from the profound changes in North American energy trade. Uncle Sam is about to start slinging massive volumes of liquefied natural gas (LNG) across the globe, but one company is providing an outsized boost: Cheniere Energy.
It was the first to take advantage of new rules allowing exports of LNG and will remain a key player for years to come. Of the five LNG export terminal projects currently operating or being constructed along American shores, Cheniere Energy owns two of them: Sabine Pass and Corpus Christi. Of the projects' combined export capacity that's expected to reach a staggering 9.5 billion cubic feet per day (Bcf/d) by the end of 2019 -- up from just 1.4 Bcf/d at the end of 2016 -- the company will boast nearly 4.5 Bcf/d of that.
To put the volumes into perspective, consider that total natural gas exports by land and sea for the entire United States averaged just 5 Bcf/d in 2015. Cheniere Energy will nearly match that all by itself.
That incredible footprint has the potential to generate ridiculous amounts of revenue, profits, and cash flow. A top-line expansion is already well underway. Revenue in the third quarter of 2017 hit $1.4 billion, up from just $465 million in the year-ago period. Operating income swelled to $297 million from just $15 million in the same comparable periods. That said, EPS is still in the red at the moment, thanks in part to an unnecessarily complex business structure with numerous subsidiaries. Then again, with less than half of all planned LNG export infrastructure expansions up and running, Cheniere Energy has great potential to grow into a reliable cash cow within the next decade.
What does it mean for investors?
Investors with a long-term mindset who are looking to buy and hold stocks for, well, forever, are likely to find success by scouring the market for great businesses with formidable operations and growth opportunities that will be difficult to derail. The ongoing energy shifts in North America and the realization of next-generation biotech tools promise to deliver exactly that for Kinder Morgan, Codexis, and Cheniere Energy -- three stocks that could belong in any portfolio.