Holding on to great companies over long periods is the best way to grow wealthy. Being able to pass on those outstanding opportunities to your children is even better. So which stocks do we think are great buy-and-hold candidates today?
We posed that question to a team of Motley Fool investors to identify three stocks our kids will brag about having owned for years, and they picked U.S. Concrete (NASDAQ:USCR), Teladoc (NYSE:TDOC), and Rollins (NYSE:ROL). Read on to find out why these companies deserve that distinction.
Consolidating the urban ready-mix concrete industry
Maxx Chatsko (U.S. Concrete): U.S. Concrete is a leading American cement producer with operations based in major metropolitan areas throughout the United States, including the San Francisco Bay Area, Texas, and the Atlantic region spanning New York City to Washington, D.C. The business grew revenue 123% from 2013 to 2017 through a combination of higher selling prices, bigger jobs, and acquisitions. But mostly acquisitions -- and that's an important detail for investors. Why?
The cement and ready-mix concrete market in most American cities is comprised of many small players. There's nothing inherently wrong with that, but U.S. Concrete sees a huge opportunity to swoop in and consolidate an otherwise fragmented industry. That's because a larger fleet of trucks and cement facilities can bid on (and win) larger projects at a higher rate, while owning more market share provides more purchasing power when it comes to raw materials and setting regional selling prices. It might be on to something.
Consider that in 2011 the company owned 113 ready-mix concrete facilities. Today, it owns 196. Or that last year the average American ready-mix concrete player enjoyed a material margin of 45.3%. U.S. Concrete achieved 49.5% -- the fourth consecutive year the business beat the national average by at least 390 basis points. Similarly, in 2017 the urban infrastructure leader achieved average selling prices of nearly $135 per cubic yard, compared to an industry average of just under $111 per cubic yard. It was the largest gap in pricing in the company's history.
Cement and concrete might not be on the top of your list for lucrative long-term growth investments, but there are 6,500 ready-mix concrete plants generating $30 billion in sales per year in the United States. In other words, there's plenty of room for U.S. Concrete to continue its aggressive expansion and provide investors with a great lesson in the power of compound interest over the long haul.
Healthcare is ripe for disruption
Nicholas Rossolillo (Teladoc): Healthcare in the U.S. is expensive and that's showing no signs of easing. Consumer trends are also shifting, with digital interaction becoming the norm rather than the exception. At that intersection lies Teladoc, the leader in virtual physician visits.
Teladoc makes money in two ways. The first is through subscription fees from employers and insurance companies that want their employees and insured to have access to medical help via the internet. The second are visit fees paid either out of pocket by patients or covered by insurance plans. The idea is that overall medical costs can be cut by making nonemergency appointments virtual.
The company may be on to something. It increased revenue by 89% in 2017, a 109% year-over-year growth. Membership increased to 20.8 million and visits in the first quarter were 606,000, a 41% and 57% jump, respectively.
Full-year revenue is expected to rise at least 50% in 2018, helped in part by last year's acquisition of former rival Best Doctors. Teladoc is expanding organically as well. Over 450 different medical subspecialties are offered, and the list of services is getting bigger. Behavioral Health Navigator, an online support system for those suffering with mental health conditions, was recently announced. The company said that 42 million Americans suffer from anxiety and 16 million from serious depression, half of whom have not received treatment in the last year. Teladoc wants to change that.
There is, of course, high risk that this investment doesn't work out. Because it is an expensive industry, Teladoc's costs are high and the company currently operates in the red. If you choose to invest, keep your bet small. If it's successful in changing the way people visit the doctor, though, Teladoc's potential is huge.
A stock to scare and delight the kids
Rich Duprey (Rollins): Creepy-crawlies will always be with us, and some may even survive a nuclear holocaust, suggesting that pest control leader Rollins will always have business, at least up to the bitter end.
Underscoring the pervasive nature of insects, Rollins recently reported record first-quarter revenue and profits that surged 22% from the year-ago period. Getting down to a bug's eye level is paying off for the owner of pest control brands like Orkin and Western Pest Services, creating the world's largest pest control company.
Two things stand out in particular about Rollins that make it a great candidate for a stock that could be passed down from one generation to the next. First, although it's a relatively seasonal business based around the metamorphosis of insects and the like, 80% of its annual $1.67 billion in revenue is recurring due to the nature of the contracts it signs with customers. While not assured, such contracts give investors peace of mind that the business has a solid financial footing.
Second, termites comprise 18% of revenue, which has been steadily increasing and rose 10% in 2017. That aspect of the business allows it to sell ancillary services, such as drywood fumigations, moisture control, and insulation.
While some 60% of its business is residential, the other 40% that comes from commercial interests gives it an opportunity to capitalize on pest outbreaks, such as bedbug infestations in recent periods.
Although Rollins stock trades at a premium, as the industry leader and with only a handful of national competitors like Terminix to compete against, it can justify its high price and still argue that it will be higher still in the years and decades to come.