One of the best ways for individual investors to build long-term wealth is to buy stocks and hold them for a very long time -- not just years, but decades. Of course, not every stock is worth an indefinite holding period.
It's important for investors to identify great businesses with formidable market positions, a track record of creating shareholder value, and simple long-term strategies for maintaining strong operations for years to come. Few businesses fit the bill, but this trio does. Here's why water technology specialist A.O. Smith (AOS 1.22%), infrastructure owner Brookfield Infrastructure Partners (BIP 0.43%), and French energy giant Total S.A. (TTE 0.72%) are stocks you can buy and hold forever.
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Water heaters are boring -- and lucrative
Sometimes the best businesses for the long haul double as the most boring. A.O. Smith has a leading market position in North America and China for various water technology products, including residential water heaters and industrial boilers. It's not flashy, but it works. A constant stream of replacements in the mature North American market provides the predictable foundation for the overall business.
The region provides some growth here and there from new housing construction and high-efficiency products. The latest example: A.O. Smith recently became the preferred supplier of water treatment products at all Lowe's home improvement stores in the United States. The move will boost the company's expansion in the home water-treatment market, which is expected to provide $400 million in revenue in 2018.
Growth opportunities in North America are great, but they're dwarfed by those in developing nations, such as China, where many newly middle-class households are buying their first-ever water heaters. It's the real reason the stock has quietly outperformed some of the best tech stocks on the market over the years.
Consider that the company will soon have at least one of its products -- including water heaters, air purifiers, and home water filters -- in more Chinese households than there are total households in the U.S. In 2017, A.O. Smith generated $1 billion in revenue from China for the first time in its history, but the market is still delivering double-digit sales and earnings growth.
A strong start to 2018 allowed management to increase full-year guidance. Midpoint expectations now call for total sales growth of 10.5% and adjusted earnings-per-share growth of 19% compared to 2017. And while there's plenty of growth left in China, management thinks it has a rough blueprint for capitalizing on growing middle-class populations throughout the world. Simply put, people will always enjoy clean, warm water -- and A.O. Smith will be happy to supply it for decades to come.
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Infrastructure is the foundation of modern economies
One thing all major economies have in common is a robust infrastructure network. Investments in highways, rail lines, and even cell towers can allow a nation's citizens to become more productive and to participate in global markets. Similarly, a lack of reliable infrastructure -- whether it's crumbling or absent altogether -- can siphon percentage points off a nation's gross domestic product growth.
While infrastructure is often overlooked, Brookfield Infrastructure Partners understands its importance and has invested accordingly. The company owns toll roads, water treatment facilities, natural gas transportation lines, timberlands, cell towers, and more. The global footprint of the portfolio helps to diversify risk and allow investors to tap into the most promising growth opportunities. So far, so good.
Shares of Brookfield Infrastructure Partners have easily outpaced the S&P 500 over historical periods, delivering 90% total returns in the last five years, compared to the index's gain of 82%. The gap was quite a bit larger at the end of 2017 (122% to 80%, respectively), but the stock price has tumbled in 2018. It could be a great opportunity for long-term investors. Why?
Brookfield Infrastructure Partners has set a goal of growing funds from operations (FFO) -- analogous to net income -- 6% to 9% per year while growing its high-yielding distribution 5% to 9% per year. There are some near-term headwinds on the horizon, but longer-term tailwinds should take over in due time.
For example, the company has recently ramped up its investment in renewable-energy power generation. Management also sees long-term opportunities in managing data as a utility manages electricity or water; smart digital tools that manage urban traffic, water use, and energy consumption more efficiently; and even economical water desalination. With a history of walloping the S&P 500, and ambitious plans for deploying capital to create even more shareholder value in the long run, Brookfield Infrastructure Partners can find a home in any portfolio.
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The future of energy runs through Total
While the global energy landscape is changing rapidly, fossil fuels will remain a crucial part of modern civilization for the remainder of the 21st century. That makes the oil and natural gas industry a good place to poke around for stocks you can buy and hold forever. Total is one of the world's few oil supermajors -- and perhaps the one most invested in the future of energy.
The French energy giant has gone all in on the future of liquefied natural gas (LNG), which can be transported across the globe in tankers, rather than pipelines. The implications are profound. Fast-growing economies -- chiefly, those most reliant on coal-fired power -- have become the largest importers of LNG in recent years. In other words, LNG, not renewables, is the world's best bet for replacing coal as quickly as possible.
A recent acquisition will make Total the world's second-largest LNG player, ranked by liquefaction capacity, in 2020. That's the same year the company expects its integrated LNG operations to deliver $3 billion in annual operating cash flow. Of course, that's on top of the cash generated by traditional business in oil production and chemical refining, which include several growth projects of their own. For example, the company's operations in the massive and surprisingly low-cost (on a production basis) Brazilian offshore field known as Libra just started up.
Put another way, management's growth strategy embodies a pragmatic outlook for how global energy trends will shift in the coming decades. Total will maintain low-cost crude oil and natural gas production today while transitioning to LNG in the near term to meet growing global demand and replace coal. And it will slowly but surely invest in a gamut of less proven energy technologies spanning next-generation renewable fuels, solar power, and energy storage. Then again, considering the gobs of cash flow thrown off by Total's core businesses, it makes sense that the future of energy would run through the energy leader and its peers.
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The best holding period is forever
There's nothing flashy about selling water heaters, but investors can surely see that A.O. Smith is capitalizing on the often-overlooked luxury of clean, warm water. Highways and cell towers are similarly taken for granted, but Brookfield Infrastructure Partners knows they're also the foundation upon which modern society is built. And while it's easy to think the "next big thing in energy" is being offered by some small start-up with slick PowerPoint slides, it's more likely to come from a company such as Total with billions of dollars in cash flow -- and nearly infinite patience -- to see it through.
There's a theme that pops up time and time again when researching investment ideas: The best businesses are often the simplest to understand. Invest accordingly.
