Buying and holding growth stocks is a great way to predictably generate wealth over the long term. But not all growth stocks are created equal; the very best have unique characteristics that set them apart -- and set up investors for years of success.
So we asked three Motley Fool investors to each discuss a growth stock that successful investors can appreciate. Read on to learn why they like Markel (NYSE:MKL), Mastercard (NYSE:MA), and Apple (NASDAQ:AAPL).
Buy and hold this fantastic business
Steve Symington (Markel): In order to be a truly successful investor, you need to have the patience to buy and hold shares of great companies for the long term. And it's hard to think of a business that fills that mold better than Markel.
There's a reason they call this specialty insurance and financial holding company a "mini-Berkshire Hathaway." Markel follows the formula that Warren Buffett used to make Berkshire a household name -- that is, with its core insurance operations, its long-term-oriented investment portfolio, and its diversified group of noninsurance, noninvesting businesses acquired and held under the Markel Ventures segment.
As per usual, last quarter demonstrated the effectiveness of this three-tiered approach for generating shareholder value. Even as Markel's investments endured stock market volatility at the start of this year, Markel was able to lean on its profitable insurance business and growth (both organic and acquisitive) at Ventures to offset that temporary weakness. Thus, Markel's book value per share still climbed more than 8% year over year to roughly $671. So even with Markel stock having more than doubled over the past five years, shares still trade at around 1.6 times book value -- a reasonable premium for this high-quality company. And I think long-term investors who buy now can still enjoy market-beating returns for decades to come.
Bet on megatrends for success
Neha Chamaria (Mastercard): There are several ways to find a growth stock, but one of my personal favorites that I believe has a high success rate is investing in well-established companies that are poised to ride the next megatrend. Think digitization, and payment processing companies like Mastercard.
You'd be surprised to know that nearly 80% of consumer purchase transactions across the globe are still made in cash, and that includes rapidly growing economies like India. Incidentally, India is also among the fastest-growing e-commerce markets in the world, which means there's tremendous underlying potential for a company like Mastercard. And it's not just about India or e-commerce -- it's about improving financial literacy, greater financial inclusion and the shift of the unbanked population to banks, and the rising adoption of cashless methods of payments like credit cards across nations.
Mastercard is already a global brand that's been connecting financial institutions, merchants, and consumers for more than five decades and facilitating electronic modes of payments. Over the years, the company has expanded its reach to more than 210 countries and conducts transactions in more than 150 currencies.
Mastercard stock has grown exponentially over the years, backed by solid growth in earnings, cash flows, and 50%-plus operating margins. With management now focused on advanced technologies like biometrics and artificial intelligence to keep up with the times even as the global shift from cash to cashless gathers steam, Mastercard should continue to see investors succeeding in the game.
The never-ending growth stock
Travis Hoium (Apple): Successful investors know the value of a company that generates cash and has a durable competitive advantage over the competition. If you combine those with growth you get a stock with home run potential. That's why after all these years of the stock going up, Apple is still a great buy today.
The chart below shows that Apple is still a growth company, increasing revenue by 45% over the last five years and generated over $53 billion of net income in the past year.
What Apple has going for it is an engrained ecosystem in smartphones that will be nearly impossible for competitors to penetrate. The iPhone may only have 15.6% of the global smartphone market, according to IDC, but it's the premium portion of the market and generates far more value than competitors. iPhone is also the center of the ecosystem, which expands to Macs, Apple TVs, AirPods, and other products that work seamlessly with Apples apps and services.
For investors, the earnings you see above are returned in the form of a dividend, currently yielding 1.6%, and share buybacks using the $145.4 billion of net cash on the balance sheet. With a new plan to be "cash neutral," that could mean hundreds of billions in share buybacks over the next decade, $100 billion of which is already authorized by the board of directors. Whether you're looking at earnings, cash on the balance sheet, or a company with a wide competitive moat, Apple fits the bill.
The bottom line
There's no way to guarantee that these three growth stocks will go on to beat the market. But whether we're talking about Markel's proven business model, Mastercard's enviable position for future digital payments and payment processing trends, or Apple's massive profits and incredible smartphone ecosystem, we think chances are high that they'll do just that -- and investors seeking success would do well to put their money to work accordingly.