There's no disputing that the stock market is the most effective wealth-creation tool the world has ever known. And the longer you can invest, the more time you'll have to watch the power of compounding returns work its magic.
But finding stocks worth holding for the long term is easier said than done. So to help get you started, we asked three Motley Fool investors to each pick a stock that they believe you would be wise to buy and hold for at least 25 years. Read on to learn why they like 2U (NASDAQ:TWOU), Visa (NYSE:V), and A.O. Smith (NYSE:AOS).
The future of higher education
Steve Symington (2U): I admit I was tempted at first to recommend a large, dividend-paying industry juggernaut. But for those who don't mind some volatility along the way, I think there's more to be gained by investing in a smaller company that still enjoys a massive runway for long-term growth -- and I believe online education platform specialist 2U fills that role perfectly.
How can we be sure 2U will survive and thrive for the next couple of decades? For one, when I had the chance to talk with 2U CEO Chip Paucek shortly after the company's IPO in 2014, he noted that their domestic graduate program (DGP) contracts typically have durations of 10 to 15 years -- and its enviable list of partners to date includes the likes of Berkeley, Harvard, Georgetown, UNC, Yale, NYU, and USC, to name only a few.
And 2U has repeatedly accelerated its rate of graduate program launches in the years since. Due to university demand, it most recently outlined goals to launch 14 DGPs in 2018, 16 DGPs in 2019, and its first-ever international graduate program (IGP) -- an MBA with University College London -- in 2019.
That's also not to mention 2U's acquisition of GetSmarter last year, which offers a compelling incremental growth opportunity through premium online short courses and nondegree alternatives. Meanwhile, earlier this year, 2U signed a multitiered partnership with WeWork, a $20 billion industry leader in shared workspaces, both bolstering its global presence and removing another potential barrier to the more widespread adoption online education.
To be clear, 2U investors have already enjoyed incredible gains so far, with shares up more than 160% over the past year as of this writing. But for those willing to bet on 2U's continued success over the next 25 years, I think those gains are only just the beginning.
Jordan Wathen (Visa): Though they are far from optically cheap, companies involved in the payments industry have some of the longest runways for growth. I like Visa as a bet on the global shift from cash to cards and view it as a royalty on increasing economic activity over time.
Visa dates back to 1958, but it's far from a mature company. In the most recent quarter, processed transactions grew 12% while total volume inched up 10% year over year on a constant currency basis, which excludes the impact of currency fluctuations. Net operating revenue also rose about 9%, helped by an 11% uptick in net revenue internationally.
What's most impressive about Visa is that growing the business requires little in the way of additional capital investment. Visa generated about $2.8 billion of operating cash flow last quarter, and sent about $2.2 billion of it back to shareholders in the form of dividends and repurchases. Very few companies can grow at double-digit rates and afford to send so much of their earnings power back to shareholders at the same time.
Visa shares trade for about 28 times Wall Street's consensus earnings estimates, a price that reflects its above-average growth potential. I see Visa as a company that could capably grow its earnings power at a mid-single-digit clip over the next decade, if not longer, making this a growth stock to buy and hold forever.
Big global trends
Reuben Gregg Brewer (A.O. Smith Corp): A.O. Smith makes something we generally take for granted: water heaters. This is a stable, slow growth business in western markets like North America, which account for around two-thirds of the company's top line. But there are countries around the world where hot water is a growth business because it's an increasingly affordable luxury for people who previously lived without water heaters.
One such country is China, where A.O. Smith has been able to grow sales at a 21% clip annually over the past decade. It expects more growth to come from this giant Asian nation, particularly as it enters the air and water purification market. Clean air and water are two other things that western nations like the United States take for granted that you just can't assume in developing countries.
But here's the thing: A.O. Smith is using the playbook that worked so well in China to enter India, another giant Asian nation. These two countries make up most of the company's foreign sales and should help to power its growth in the years ahead as more and more of their citizens move up the socioeconomic ladder. China and India are what A.O. Smith calls "mega trends," the kind that last for decades.
I know that water heaters sound boring. If you look beyond the developed market you live in, though, they suddenly become a very exciting long-term growth opportunity. A.O. Smith is planning to be there to take advantage of that growth over the next 25 years and beyond.
The bottom line
A lot can happen in 25 years, so there's no way we can absolutely guarantee that these three stocks will beat the market in that time. But between 2U's long-term contracts and accelerating program launches, Visa's favorable business economics and long runway for growth, and A.O. Smith's stable North American business complemented by compelling international opportunities, we think the chances are high that they'll do exactly that.
Jordan Wathen has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Visa. The Motley Fool recommends 2U. The Motley Fool has a disclosure policy.