The potential to accumulate significant wealth over time is supported by studies showing that long-term investing pays off better than short-term trading. The challenge for investors, though, is figuring out what stocks are worth owning for decades.
Companies are always innovating, and as a result, many stocks that are winners today might not be winners tomorrow. While there's no surefire way to avoid investing in the wrong stock, focusing on companies likely to enjoy steady demand regardless of shifting consumer tastes may improve the odds of picking a winner.
With that in mind, we asked three Motley Fool contributors to recommend their favorite stocks to stash away in a 50-year portfolio. Read on to find out why they believe Intuitive Surgical (ISRG 0.43%), A.O. Smith Corporation (AOS -1.16%), and Verizon (VZ 0.88%) can be staples in long-haul investment accounts.
A better way to treat patients
Todd Campbell (Intuitive Surgical): When it comes to picking stocks for portfolios with an ultra-long-term mindset, I like to focus on stocks like Intuitive Surgical that are addressing megatrends.
Intuitive Surgical makes da Vinci robots used to assist surgeons performing minimally invasive procedures. These robots provide significant advantages over freehand surgery, including a lower risk of complications and faster recovery times.
Da Vinci systems are already used in gallbladder, gynecological, prostate cancer, urological, and hernia operations. In 2018, the number of procedures performed with help from a da Vinci system increased 18% to over 1 million. This year, Intuitive Surgical thinks procedure volume will grow another 16% to 17% as the number of da Vinci robots installed at hospitals and surgery centers swells to over 5,200 worldwide.
The ongoing uptake of robotic surgery is fueling solid double-digit top-line and bottom-line growth. Through the first six months of 2019, Intuitive Surgical's revenue has increased by 18% year over year to $2.1 billion, and its operating profit has improved 11% to $817 million.
Other companies are trying to develop competing robots, but Intuitive Surgical's lead is significant. It costs a lot to acquire these systems, so customer switching isn't as big a risk to the company. And because these systems use disposable instruments, each new installation of a da Vinci results in a new, steady stream of recurring revenue.
Intuitive Surgical's long-term goal is to expand da Vinci's use into more surgical indications. Since tens of millions of operations are performed every year, I think the runway for this company is long enough to support market-beating growth for the foreseeable future, making this a top stock to include in long-haul portfolios.
A little trade hiccup won't derail this company
Tyler Crowe (A.O. Smith): A water heater is one of those boring products that you pay zero attention to until it's broken and you need one right now. While no one wants to replace a water heater in the middle of the night, the business of manufacturing and selling this must-have appliance can be pretty lucrative. That's especially true when you have a dominant market share like A.O. Smith does.
Since 1999, U.S. residential water heater sales have varied between 8 million and 10 million annually, with more than 80% of those being replacements. That is an incredibly stable business that doesn't appear to be going anywhere soon. A.O. Smith has spent the past two decades increasing market share, and today it stands at close to a 40% share in residential water heaters and 50% in commercial heaters. That has translated into a rather remarkable cash flow engine. It has used that cash to invest in growing markets overseas, pay a fast-growing dividend, and buy back shares. All of which has translated into a remarkable total return over the past decade.
Some concerns lately about the U.S.-China trade relationship may have some investors spooked. But China isn't A.O. Smith's only growth market. One thing that has been consistent for years is that it knows how to turn a boring but necessary product into fantastic shareholder returns, and anyone looking to invest over multiple decades would do well to look at this stock.
A telecommunications stock to bet on now
Travis Hoium (Verizon): Investors looking to buy and hold stocks over a very long period of time need to find companies that have a competitive moat of some kind that will help maintain and grow their business. In telecommunications, there may be no better moat than the regulatory protections from spectrum bids that wireless companies own and the sheer scale they need to operate. It would be nearly impossible for a start-up to enter wireless telecommunications today, and that's great for a giant like Verizon.
You can see below that Verizon has grown slowly but surely over the past decade, and operating cash flow has hovered between $30 billion and $40 billion. But I think that's just scratching the surface of its potential.
Right now, Verizon is building out a 5G network that will enable new technologies like electric vehicles, virtual and augmented reality, smart cities, and much more. This will increase the number of connections, potentially by many multiples as connected devices increase. That presents a tremendous growth opportunity.
At the same time, Verizon's biggest price pressure coming from Sprint and T-Mobile may be easing as the two move closer to a merger. If their deal is approved, the U.S. wireless telecommunications business would be dominated by Verizon, AT&T, and Sprint/T-Mobile. There isn't typically as much pricing pressure in an oligopoly like that, and that should allow prices to slowly increase, which will help margins.
Given how crucial wireless communication is in the U.S. and how few competitors there are, I think Verizon is well positioned for the very long term. That's why this is a great stock to hold for the next 50 years -- and the current 4.1% dividend yield is just icing on the cake.