Simple, not easy. That may be one of the best ways to describe buy-and-hold investing. Finding great companies at great prices, buying them, and then hunkering down for the long haul is pretty simple. It gets difficult when your emotions start to take control and when you fail to update your thesis when new information arises.
That said, there may not be a better way to build wealth. It's the tactic Warren Buffett relied on to become a billionaire. In fact, he didn't reach the milestone until he turned 56 years old. Investors looking for great companies they can buy and hold for the next decade (or longer) should take a closer look at consumer water technology specialist A.O. Smith (AOS -3.41%), lithium producer Albemarle (ALB -4.50%), and biopharma enabler Repligen (RGEN 1.21%).
Cashing in on China's middle class
It's quite possible most investors have never heard of A.O. Smith. That's mostly because it operates primarily in the boring business of water heaters. While most homeowners in the United States only remember they own a water heater when it malfunctions and they need to replace it, many households in China have recently purchased their first water heater ever. That's brought some excitement to the business in recent years.
Last year, A.O. Smith generated $1 billion in revenue from China for the first time ever, but it's expected to continuing growing sales in the country at a double-digit clip for the foreseeable future. Meanwhile, the slow-and-steady North American market managed to grow sales over 9% in 2017 compared to the previous year thanks to strong housing demand and an appetite for higher-efficiency (and higher-margin) products.
Despite over a decade of above-average growth, management sees plenty of growth opportunities left to explore and exploit in the next 10 years. In addition to water heaters, A.O. Smith has a series of home water purification and air treatment products that have sold very well in China. Water treatment sales in the country grew from just $35 million in 2011 to $240 million in 2017. This year, it expects global water treatment revenue to leap 33% to $400 million.
Management also believes that India could represent as big of an opportunity as China. There are reasons to both believe and discount that statement, but considering revenue from India weighed in at just $27 million in 2017, there's certainly a significant opportunity for growth. All in all, A.O. Smith's impeccable track record and ability to leverage a growing global middle class makes it a great, if boring, stock to buy for the long haul. Then again, there's nothing boring about total returns of 300% in the last five years.
Chile's government just gave growth the green light
Albemarle is the world's largest lithium producer, and it's likely to remain in the top spot for the foreseeable future. That's mostly owed to the company's enviable assets in South America's bountiful Lithium Triangle, although the new government of Chile just opened the floodgates by increasing the company's production quota to 145,000 metric tons (MT) per year. By comparison, total global production was just 215,000 MT last year.
While the move was somewhat anticipated, the company's shares haven't responded. To be fair, Albemarle won't come close to producing 145,000 MT of lithium in a year in South America anytime soon, nor will it need to. For starters, global demand couldn't handle that volume. And the Chilean government quota extends to 2043.
Either way, Albemarle is well-positioned to remain a leading lithium stock for years to come. Considering the company's lithium segment grew sales and adjusted EBITDA 35% and 43%, respectively, from 2016 to 2017, that could be great news for shareholders. The current eye-popping margins enjoyed by lithium producers probably won't last indefinitely, but most projections call for nearly insatiable demand for the next decade at least.
Of course, things could deteriorate quickly if that proves wrong. The good news is the company is relatively well diversified compared to peers, with 58% of revenue and 41% of adjusted EBITDA sourced from non-lithium businesses. Therefore, if you want to own a piece of the electrification of transportation and coming-of-age of energy storage -- and hedge against potential downside -- then Albemarle stock might be the best way to do that.
Quietly powering the biopharma industry
Repligen lives in the biopharma sector, but it doesn't bother with the usual regulatory headaches. That's because the company supplies processing equipment and consumables required to test and manufacture biologic drugs, rather than develop therapeutics in risky clinical trials. That simple hack allows it to piggyback on the overall growth of biopharma without the commensurate risks.
It's been a great business strategy so far. Shares are up 600% in the last 10 years, although a market cap of $1.6 billion hints that there's plenty of room for expansion for the bioprocessing leader.
In 2017, Repligen reported total revenue of $141 million. That's hardly a drop in the biopharma bucket, but it amounted to an impressive 35% jump from the prior year. Management sees much of the same in the year ahead, thanks largely to a recent acquisition. The bioprocess leader expects total sales of $180 million to $186 million at gross margin of up to 56.5% in 2018. That could deliver adjusted net income of up to $32 million this year, compared to just $27 million last year.
Just as in prior years, acquisitions and organic growth should continue to power the business higher for the foreseeable future. Repligen is also perfectly positioned to exploit the shift toward single-use processing equipment, which allows biologic drug manufacturers to greatly reduce contamination risks and downtime while improving margins and production volumes.
Case in point: The company recently announced the first and only commercially available single-use purification column suited for commercial biologics production. Products like that may go largely unnoticed by investors, but they could very well end up being a game-changer for customers.
Go long and prosper
Some things aren't for everyone. Buy-and-hold investing isn't one of them. Any individual investor can design a wealth-building plan that centers on owning great companies for years or even decades. Of course, it's important to identify businesses that have key advantages and growth opportunities to exploit and a history of creating shareholder value. A.O. Smith, Albemarle, and Repligen are three stocks that fit the bill -- and investors should feel comfortable owning them for the long haul.