Most of what we worry about never happens.
Now, that's not to say bad things don't occur -- they do, and they have certainly been known to occur in the stock market. In particular, once in a while, after the news media and the pundits deluge us with financial warnings, the very things they predict actually do transpire.
However, making long-term investment decisions based on what the media and the talking heads are focused on during a given day or month just doesn't work. What does work is investing in companies that have winning business models, sticking with them, and buying more during the dips, when most people are letting worry get the better of them.
Here are three large companies with winning long-term strategies that our Motley Fool contributors think are worth buying now and holding: Arista Networks (NYSE:ANET), Netflix (NASDAQ:NFLX), and Brookfield Infrastructure Partners (NYSE:BIP).
Betting on future internet needs
Nicholas Rossolillo (Arista Networks): Shares of this network hardware and software provider have been on a wild ride as of late. After ending 2018 down 11%, the stock came roaring back in 2019 and was up as much as 50% from where it began the year. But, as of this writing, its year-to-date return stands at just 7%. Buying opportunity? I think so.
Here's the skinny. Arista Networks provides components and management tools for the cloud -- data centers that are quickly becoming the backbone of the internet and business operations around the world. A couple of issues are causing the stock's extreme volatility. First, Arista is priced for growth. Its market cap of $16.9 billion is 25.8 times its last 12 months of earnings; by comparison, the S&P 500's price to earnings ratio is 22.5. But Arista has indicated that its biggest cloud computing customers are slowing down their capital expenditures. It now forecasts revenue growth from them will be in the single-digit percentage range, and some investors worry that the company's high-growth story is coming to an end.
Second, investors are increasingly concerned that a weakening global economy and the trade war between the U.S. and China are exacerbating the company's problems. To be sure, if the world does fall into recession, business spending and investment will likely take a dive. But it's easy to forget that this type of spending generally ebbs and flows, and the stock market will often price in its expectations well ahead of time. Hence, the recent plunge in Arista's stock.
Looking to the long term, though, there is plenty of gas left in the tank for this data center component manufacturer. Cloud computing is still a high-growth concern, with worldwide spending expected to keep going up by double-digit percentages annually for the foreseeable future. Plus, Arista is building on its presence in the edge and campus data center segment, which is developing centers that will provide computing power closer to the locations where it's being used and speed up data exchange.
Netflix looks affordable for all the wrong reasons
Anders Bylund (Netflix): If you bought shares of the leading name in streaming video services at any point during the last 15 years, you made a great investment. Netflix shares have tripled in value over the last three years, quadrupled in the past five years, and delivered a thrilling 4,400% return over the last decade. Over each of those periods, it absolutely thrashed the wider market.
And in each case, critics argued that the stock was due for a big fall.
Now, here we are again, with many analysts and bloggers arguing that Netflix's best days are behind it. New competition is rolling out, backed by household names such as Walt Disney and HBO. Netflix already serves about 152 million customers around the world, though it fell short of management's guidance for subscriber growth in the second quarter. The stock has reacted to the barrage of bad news, trading 12% lower over the last 52 weeks. And Netflix shares still look expensive at 120 times trailing earnings, not to mention those negative free cash flows. This is a tremendous crash in the making, right?
Not so fast.
We've seen this movie before, and it has always had a happy ending. The domestic market may be close to saturation, but Netflix has a proven ability to boost its profitability by raising monthly subscription prices. Recent moves on that front helped the company boost domestic revenues by 22% while the subscriber count climbed 7% higher -- slower than in years past, but still growing despite the price hike.
The simpler growth story for the company nowadays is in international markets. It's a big world out there, and Netflix only serves 92 million non-U.S. households today. It added 4.5 million international accounts in the second quarter alone. That's a disappointment I can live with. And at the end of that market-penetration rainbow, you'll find further price-boosting efforts that should keep revenues rising for many years to come.
As for the impending assault by high-powered rivals, let me just point out that not a single one of these new services appear to have cloned what makes Netflix's business model so successful. Amazon Prime Video bends over backward to show what you can buy from the e-tailer at every turn. Disney-owned Hulu is polluted with unskippable ads. We haven't seen Disney+ yet, but I expect the House of Mouse to market a plethora of show-related merchandise through its new platform.
Keep it simple, keep it clean, make it easy to find high-quality content. That's the not-so-secret recipe, and none of Netflix's rivals dare to follow it. Not even Disney+ looks like much of a Netflix-killer.
That might change eventually, but I see no end to Netflix's prosperity until then. Its stock price is taking a breather from its long-term climb, which gives us a chance to pick up shares in the entertainment giant on the cheap.
Worth buying near the all-time high
Jason Hall (Brookfield Infrastructure Partners): Shares -- technically units since it's a publicly traded partnership -- of Brookfield Infrastructure hit another all-time high on Aug. 27. Moreover, they're up a strong 34% so far this year, and their total return -- which includes dividends paid -- of 37% is more than double the 18% total return the S&P 500 has delivered to investors in 2019.
Yet even with the share price setting records regularly this summer, it's both reasonably priced and the kind of business investors should want to own, and be willing to buy near the high.
That's because Brookfield's core business -- owning and operating water, transportation, telecommunications, energy, and utility assets -- generates substantial cash flows that are also incredibly consistent and predictable across just about any economic environment. These are basic services that people and businesses rely on. That means investors can rely on Brookfield Infrastructure to continue delivering a steady dividend that it has raised every year for nearly a decade now, and that yields more than 4% at recent prices.
Moreover, despite it already being a large-cap company, it has substantial room for decades of growth. The kinds of infrastructure assets it owns are not just critical to modern life, but are only going to be even more in-demand as the global urban middle class expands.
Put it all together, and you have a business that's delivering steady double-digit percentage growth, has a plan -- and huge secular tailwind -- that should support that growth for many years to come, and generates cash flows from some of the most recession-resistant assets out there.
It's time to look past the all-time-high stock price and see the much bigger and richer future Brookfield Infrastructure and its investors should enjoy.