Put plainly, there are no surefire investing strategies that are guaranteed to return a profit. But in recent years, buying and holding the so-called "FANG" stocks has worked out quite well.
The FANG acronym, coined by CNBC Mad Money host Jim Cramer, describes the four hottest, high-growth tech stocks in the market:
- Google, which is now a subsidiary of its parent company, Alphabet
Over the trailing two-year period through April 25, 2018, Facebook, Amazon, Netflix, and Alphabet were up a respective 36%, 117%, 219%, and 44%. By comparison, the broad-based S&P 500 had risen by a tamer 28%. As a whole, FANG has delivered for investors.
Of course, the question has also been raised as to whether FANG stocks can continue to deliver after such impressive returns. With the exception of Netflix, which looks to remain cash-flow-negative as it spends on its international streaming expansion and digital library, my research leads me to believe that Facebook, Amazon, and Alphabet do offer an attractive value proposition over the next five to 10 years.
Now introducing the "VISE" stocks
But are they the best stocks to own? That's debatable. In my view, another group of four stocks with clear competitive advantages has the potential to outperform the FANG stocks over the next five to 10 years. Ladies and gentlemen, say hello to the "VISE" stocks.
The VISE acronym stands for:
- Visa (NYSE:V)
- Intuitive Surgical (NASDAQ:ISRG)
- Sirius XM Holdings (NASDAQ:SIRI)
- Electronic Arts (NASDAQ:EA)
Each of these four companies brings clear-cut competitive advantages to the table that should allow it to handily outperform the broader market (and the FANG stocks).
Did you know that Visa controls more than half of all network purchase volume market share in the United States? According to data from WalletHub, Visa's U.S. credit market share jumped from 42.5% in 2006 to 50.6% in 2016, which placed it almost 28 percentage points higher than American Express, its next-closest competitor. Having such a clear advantage over its peers in arguably one of the most consumption-oriented countries on the planet is a good thing.
Beyond this, Visa benefits from high barriers to entry in the payment processing industry, as well as its lack of credit risk. For instance, it takes a lot of money to set up the infrastructure needed to process payments for merchants. It also takes a lot of time to build rapport with merchants, which simply can't be quantified on a balance sheet. Visa's massive merchant network, which tops 40 million, is simply unparalleled.
As noted, Visa is a payment processor and not a lender, like a few of its peers. While a growing economy can allow its processing and lending peers to double dip on profits, a contracting economy or recession can expose lenders to the dangers of credit delinquencies. Visa doesn't have these concerns since it's not a lender. And, since it's geographically diversified, its growth has been almost uninterrupted.
Tack on a rapidly growing dividend that has ample room to expand, and you have a megacap payment processor with true double-digit annual average growth potential.
The beauty of robotic-assisted surgical device maker Intuitive Surgical is that it just seems to get stronger with each passing year. Its primary advantage being its first-to-market status with its da Vinci surgical system, which has gone through numerous generations of upgrades.
Yet, here's the interesting thing about Intuitive Surgical: Its machines aren't its big moneymaker. Though the da Vinci surgical system ranges in cost from $0.5 million to $2.5 million, it's also a highly specialized piece of equipment that can cost a pretty penny to build and research. The margins on its da Vinci machines aren't all that impressive.
The "wow" factor for this company derives from the sale of instruments used with each surgical procedure, as well as the regular servicing needs of the system. These significantly higher margin categories continue to grow as the base of installed da Vinci systems expands. If you've ever heard of the "razor-and-blades" business model, whereby a company sells a low-margin razor, then makes a fortune selling the customer blades at a high margin thereafter, the idea here is similar. Intuitive sells its da Vinci system to a hospital and trains surgeons, locking that consumer in for a long period of time since it's expensive and time-consuming to switch surgical systems. And, in the process, it boosts its margins by securing more instrument and service revenue.
Intuitive Surgical is already dominant in gynecology and urology surgeries, and looks to have a promising future in other soft tissue surgeries, such as cardiothoracic, colorectal, and other general surgeries. Personally, I don't see how any of its peers will close Intuitive Surgical's competitive gap.
Sirius XM Holdings
Satellite radio has come a long way in nine years. In 2009, it didn't look as if Sirius XM would live to see another day. Nine years later, it's stronger than ever and firmly in control of its growth path.
The biggest lure of satellite radio compared to online and terrestrial radio is the means by which revenue is generated. Both terrestrial and online radio are ad-dependent platforms. This suggests that when the economy contracts, and advertisers pull back on their spending, traditional radio providers feel the pinch. But that's not an issue for Sirius XM, which generated only 3% of its $1.38 billion in first-quarter revenue from advertisements. Instead, Sirius XM relies on subscription revenue to account for 81% of sales -- and subscriptions are much easier to hang onto than corporate ad dollars.
Sirius XM has another intriguing advantage: its ability to keep costs down. Sure, the company has to spend the big bucks from time to time to secure talent like Howard Stern and garner lucrative deals with the National Football League. But the key here is that its customer-acquisition costs are essentially fixed. Regardless of how many new customers Sirius XM acquires, its satellite network costs the company pretty much the same to operate, year in and year out. That's a recipe for higher margins over the long haul.
As the clear satellite monopoly, Sirius XM Holdings should have little issue commanding price hikes for its services that outpace the inflation rate. This should bode very well for patient investors.
Finally, gaming giant Electronic Arts looks to deliver solid long-term returns as its core customer continues to shift away from physical gaming into the more profitable digital model.
Electronic Arts' third-quarter operating results clearly show this to be a continuing positive trend for the company. Over the trailing 12-month period ending Dec. 31, 2016, packaged goods and other net revenue accounted for almost 43% of the company's total sales. However, the same trailing 12-month period through Dec. 31, 2017 shows that packaged goods and other revenue had fallen to less than 36% of total sales, with the remainder coming from digital net revenue. Since digital gaming is a higher margin product that can be put in front of the consumer quicker than packaged goods, this is all good news.
Perhaps even more impressive is how EA, as Electronic Arts is better known, was able to shake off worse-than-expected sales for Star Wars: Battlefront 2, as well as backlash from gamers who felt that the monetization strategy for the game gave an unfair advantage to wealthier gamers. Despite coming in below expectations on this particular game, the company's core lineup that includes the Madden franchise, FIFA, and The Sims more than picked up the slack. In other words, you're not buying a one-hit wonder with EA.
With the company continuing to innovative and engage with live in-game updates, double-digit annual EPS growth isn't out of the question.
The only question left to ask is this: Are the VISE stocks right for you?