The broader market gave investors a preliminary scare ahead of Halloween last month, but there's no reason to worry about short-term volatility if you have at least five years to invest. There are great companies that got hurt during the pandemic but are primed for a strong comeback.
Three Motley Fool contributors offered their best stock picks that can safely grow your money over the long term. Here's why they chose Walt Disney (DIS -0.18%), Starbucks (SBUX -0.04%), and Coca-Cola (KO -0.08%).
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Disney's theme parks will come back stronger than ever
John Ballard (Walt Disney): Disney has entertained generations of fans for nearly a century and will still be entertaining people decades from now. At the heart of the company's enduring value are its talented storytellers that keep churning out new content every year.
A popular new Pixar movie can stimulate revenue growth, not just at the box office, but also at Disney's theme parks and through selling its merchandise. This makes the company's operating model an investor's dream.
The rapid growth of Disney+, which went from zero to 116 million subscribers in less than two years, is a testament to the value of Disney's content library. The next decade should be very rewarding for shareholders, as Disney+, ESPN+, and Hulu continue to grow, and as the company begins to gain from the digital enhancements it made at the theme parks during the pandemic.
Disney hasn't quite completed a full recovery, but recent results show an upward trajectory on the top line. Disney generated $17 billion in total revenue in the most-recent quarter, up 45% from the year-ago quarter and up sequentially from $15.6 billion in fiscal Q2.
Analysts expect Disney to deliver a 25% advance on the top line next year, as CEO Bob Chapek sees strong booking trends for theme parks and cruise ships in the near term.
The loss of earnings power over the last year at the theme parks, as well as investments to support growth in streaming, makes it difficult to gauge the value of Disney's stock right now. But its shares currently trade at 21 times Disney's peak earnings in fiscal 2018. This looks quite attractive for a business that should see pent-up demand at its parks segment over the next few years, on top of the long growth runway it has in streaming.
Custom coffee for the masses
Jennifer Saibil (Starbucks): Starbucks has been a solid performer for many years. It consistently innovates with new products and upgrades customer service, which has given it the leverage to turn the humble cup of coffee into a superpower growth driver. It's on target to become the largest restaurant chain in the world (potentially overtaking the current leader, McDonald's, which has more than 36,000 stores), growing from more than 33,000 stores at the end of the 2021 second quarter to 55,000 by 2030.
The company suffered declines in 2020 but rebounded in the the 2021 third fiscal quarter (ended June 27) with a 78% increase in revenue year over year to a record $7.5 billion. It also posted record profits of $1.01 in earnings per share. Management is expecting 18% to 21% comps growth in the fourth quarter and 1,100 net new stores for the fiscal year. Six hundred of those are in China, its largest international market, where it surpassed 5,000 stores in Q3.
Artificial intelligence has become the backbone of the Starbucks model, and the company uses its data to simplify the purchase process, customizing the experience for each buyer. That helps it stand out from competition.
Another growth factor is its store types, which include sit-down restaurants, drive-thrus, pickup-only locations, and various combinations. Again, Starbucks uses its large data base to determine what kind of store to develop in each location. This contributes to the efficient use of resources and greater profitability.
Starbucks stock has gained 110% over the past five years, outdoing the broader market. Shares trade at a price-to-earnings ratio (P/E) of 47, and the company pays a growing dividend that yields 1.6%, also higher than the S&P 500 average.
Starbucks is a dependable stock that should continue to deliver years of gains for investors. The company releases fourth-quarter earnings on Oct. 28. If they're strong, expect more upward movement.
Quenching investors' thirst for returns
Parkev Tatevosian (Coca-Cola): The international beverage manufacturer stands to benefit as the world recovers from COVID-19. The company sells drinks that are consumed both at home and away. However, it has a larger market share in away-from-home channels like restaurants, movie theaters, theme parks, and sports stadiums. It's spent years developing exclusive relationships with venues.
Moreover, folks pay higher prices for beverages purchased for consumption outside their homes. Consider how much you paid for a Coke at the grocery store, versus at a restaurant. And this part of its business is more protected from competitors.
When you go to a grocery store, you see Coca-Cola's products alongside PepsiCo's and others. This isn't usually the case at places like restaurants and theme parks, which only sell one or the other. This hurt Coca-Cola during the pandemic's onset when most of these venues were temporarily closed, but it will help Coca-Cola now that they're reopening.
The company is an excellent business operator and has earned an average pre-tax income of 24.2% over the last decade. That's much higher than its closest rival PepsiCo, which made (13.3%) during the same time period. It may not be an apples-to-apples comparison, but it highlights Coca-Cola's excellent performance.
Coca-Cola stock is far from being expensive right now. It's trading at a price-to-free-cash-flow ratio of 20, which is near the lowest it has been for the last decade. Solid prospects as economies reopen worldwide, a history of excellent operating performance, and a relatively inexpensive stock valuation make Coca-Cola a top stock to buy in October.
