One of the easiest ways to improve your stock portfolio's returns is to lengthen your holding period. This added time lets your winners keep winning and prevents overreactions to short-term fears that might surround temporarily underperforming stocks.
Today we will look at two stocks that operate in very different industries yet both exhibit qualities like compounding growth that make them prime candidates for buy-and-hold investing.
Intent to reimagine travel, experiences, and stays of almost any length, Airbnb (ABNB -1.53%) is one of the tech market's most recent darlings to go public. Led by CEO and co-founder Brian Chesky, the company has a strong grade of 4.3 (out of five) stars from Glassdoor, with Chesky receiving a 92% approval rating from his employees. When these figures are above four stars and 90%, respectively, it often signifies an incredible culture with strong leadership -- making Airbnb's metrics very promising.
Furthermore, Airbnb has positioned itself well to capture gains from one of the biggest developing trends in the global economy today: workplace flexibility. Briefly touching on this point in its third-quarter shareholder letter, management stated, "Technologies like Zoom [Video Communications] make it possible to work from home. Airbnb makes it possible to work from any home."
While it is difficult to draw a direct line from workplace flexibility to increasing Airbnb profits, it is clear that the company is poised to grow alongside the Web 3.0 revolution which will focus on decentralization, openness, and greater user utility. As this new iteration of the internet takes hold and continues to spread, Airbnb's unique business structure, which allows strangers to trust strangers, could become a shining example of Web 3.0's power.
Riding this ongoing revolution and the steady reopening of global travel, Airbnb posted record revenue of $2.2 billion during its third quarter, which was 36% above Q3 2019. Perhaps more importantly to investors, the company has generated $1.6 billion in free cash flow (FCF) over the trailing 12 months, despite still being in high-growth mode.
This leaves the stock trading around 70 times FCF, almost five times more expensive than the S&P 500's average of 15. However, this includes Q4 2020, which amounted to a negative $667 million in FCF, meaning that Airbnb trades closer to 50 times FCF should it merely break even in Q4 2021.
To highlight why this 50 times FCF is important, let's take a look at the juggernaut that is Microsoft. With a current market capitalization of around $2.5 trillion and trailing-12-months FCF of $50 billion, Microsoft also trades for around 50 times FCF.
Considering that Microsoft is over 20 times the size of Airbnb by market cap, I struggle to believe that the former's growth potential is as strong as the latter's -- yet they trade at the same 50 times FCF. With this in mind, the company has massive multibagger potential despite a market cap north of $100 billion already.
2. Kinsale Capital Group
Shifting from the transformational world of Web 3.0, we turn to the equally as exciting excess and surplus (E&S) insurance industry and Kinsale Capital Group (KNSL -5.69%). Generally speaking, growth stocks and insurance rarely go hand in hand, but Kinsale grew its gross written premium (GWP) by 37% year over year during the third quarter.
And this wasn't a one-off quarter. Since 2016, the company has had annualized growth rates of 26% and 30% for GWP and net operating earnings, respectively.
Led by its sole focus on the E&S insurance market, Kinsale is the only pure-play insurer in this niche and tends to target small- to medium-sized accounts. Generating the majority of its GWP from its casualty insurance lines, the company insures what it calls "hard to place risks," which include:
- Construction: contractors, subcontractors
- Specialty casualty: energy, environmental, life sciences, and product liability
- General and excess casualty: apartments, condominiums, RV parks, etc.
- Professional liability: lawyers, engineers, accountants, etc.
A full list of insurance lines would take too long to write out here, but the main point is that Kinsale has a tight grip on many unique, often tricky areas. With this exclusive focus on E&S, Kinsale has averaged an 83.5% combined ratio from 2016 to 2020, compared to its peers' average of 95.6% over the same time frame.
An insurer's combined ratio adds incurred losses and expenses and divides them by total earned premium. A figure below 100% represents profitability, making Kinsale's mark of 83.5% very impressive as it leads to a fantastic profit margin of 24%.
With the E&S industry worth nearly $70 billion, Kinsale still has only a 1% market share, highlighting that its growth story is only just beginning. Considering this market share potential and its status as the best-performing and only pure-play E&S insurer in the industry, Kinsale's high growth rates make it look like a bargain at only 34 times earnings.