Making money from stocks is not difficult. If you have at least 10 years to invest, you can stack the odds significantly in your favor by buying shares of leading brands that have demonstrated a consistent record of growth and profitability.
Apple (AAPL -1.22%), Activision Blizzard (ATVI), and Microsoft (MSFT -1.27%) are three stocks that fit the bill. They have each delivered market-beating returns for investors over the years, and are still pursuing new growth opportunities that should see them continue to outperform the market over the long term.
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A top consumer brand
If you've checked out Apple's stock lately, you've probably noticed it has a very modest P/E. It trades for under 14 times trailing earnings, which is much lower than the trailing P/E of 19 for the average stock in the S&P 500 Index.
One reason for Apple's relatively low P/E is the concern that investors have about slowing sales of the iPhone. Unit sales were flat in the last quarter, but that doesn't reflect anything negative about Apple's brand -- one of the most valuable in the world. It reflects slowing growth across the smartphone market, which has been flattening out in recent years.
Still, Apple has been able to exert its brand power by getting customers to pay higher prices for recent iPhones. Strong sales of the iPhone X allowed Apple to grow iPhone revenue 29% year over year in the last quarter. That trend will likely continue given that the new iPhone XS and iPad Pro are priced even higher than the year-ago models.
Analysts expect Apple to grow earnings 13% per year over the next five years. Part of that growth will come from its fast-growing services business, including Apple Pay, Apple Music, and iCloud subscription plans. One analyst estimated that by 2020, its services business could be worth between $111 to $177 per share, which is about two-thirds of the current stock price on the low end of that range.
Apple is also working on self-driving cars, a new streaming service for Apple TV, and who knows what else. The company has plenty of cash to reinvest in opportunities, and with the stock trading at just 10.7 times next year's earnings estimates, it looks like a good investment for the next decade.
A gaming empire
There are many trends favoring continued growth in Activision's business. Video games are a booming industry expected to reach $180 billion by 2021, according to industry researcher Newzoo. More people are playing games every year across PC, console, and mobile devices, which provides a strong tailwind for Activision shareholders.
Activision has a Disney-like library of games and content, which has attracted tens of millions of fans, and those players spend a lot of money. Gaming has become more like a service in recent years, in which a company releases a game and then sells gamers a stream of content that they can purchase while playing. Activision generates the majority of its annual revenue -- more than $4 billion -- from this in-game spending. It's a lucrative business model that has allowed the company to generate $1.8 billion in free cash flow over the last year.
The game maker distributes a small amount of that cash back to shareholders in dividends. Currently, the yield is 0.71%. The company is using the rest of its cash to invest in promising new growth avenues, such as esports, in-game advertising, consumer products, as well as a movie based on the best-selling Call of Duty franchise. At a price-to-free-cash-flow ratio of 21, the stock should deliver good returns from here.
Looking like a growth stock once again
Microsoft has been dominant for a long time with its Windows and Office software. The familiarity that consumers and businesses have with these products means the company should continue printing money for shareholders for a long time. Microsoft generated $32 billion in free cash flow over the last year.
The network-effect advantage Microsoft has with software would be enough of a reason to buy and hold the stock, but the growth story has recently gotten much better. The company has emerged as a major cloud and services provider under CEO Satya Nadella. The software giant has surpassed industry stalwarts like IBM and Oracle to reach second place in cloud market share behind Amazon Web Services.
Additionally, the company has turned its Office software suite into a subscription service with Office 365, which is suggestive of a Microsoft that is no longer tied to the PC, but able to connect with users no matter what device or platform they use.
The results have been impressive. Its Productivity and Business Processes division (which includes Office 365) grew 20% in fiscal 2018 (which ended in June). LinkedIn -- the social network for working professionals -- continues to grow strongly, too, up 33% in the first quarter.
Revenue from the Intelligent Cloud division continues to impress, surging 24% in the first quarter. Most notable is growth from Microsoft Azure, up 76% in the first quarter.
Those were the big drivers that fueled total revenue growth of 21% in fiscal 2018. That level of growth has investors excited about the future of Microsoft. The stock trades for a forward P/E of 20, which is not much at all given that earnings are expected to grow nearly 14% per year over the next five years.
While nothing is guaranteed in investing, I fully expect Apple, Activision Blizzard, and Microsoft to still be leaders in their respective industries in 10 years. That should translate to good returns for shareholders over the next decade.
