When deep in the woods, it's hard to see the forest for the trees. This is what it feels like amid economic uncertainty and dire financial headlines swirling daily. It can be tempting to pack up the tent and go home. As retail investors, we get nervous when the market goes down, and with good reason. It's difficult to watch our hard-earned dollars slip away. This is why it is essential to have a dedicated long-term investment strategy and focus on the forest, not the trees.
When the market goes down, many individuals hit the exits and wait for it to go back up or try to time the bottom. Unfortunately, no one can consistently time a market bottom. And the market can turn on a dime, leaving investors to buy at inflated prices once again. We have seen this happen in December 2018 and, of course, in March 2020. Both markets looked terrible when the losses were mounting but were terrific buying opportunities for long-term investors.
The market is far above these levels, even given the current pullback. This chart shows the major indices over the last five years.
The returns are even more pronounced over the last 10 years, proving that time in the market is better than timing the market. This isn't to say that blindly throwing money into stocks is a good strategy. It is far better to use a system like dollar-cost averaging (DCA), which helps to invest money systematically over time, thus reducing timing risks.
Limiting speculative investments and focusing on highly profitable, well-managed companies with tremendous secular tailwinds is also prudent. These stocks offer these qualities in spades.
1. Microsoft continues to impress
The largest software company by revenue in the world still has tremendous upside. Microsoft (MSFT 0.43%) hasn't rested on its laurels and is set up to make investors substantial profits well into the future.
Microsoft has highly successful legacy businesses like Microsoft Office and Windows, and several other irons in the fire, such as cloud computing and gaming. In the prior quarter, the company's Q3 FY22, a record $49.4 billion in sales was reported -- an increase of 18% year over year (YOY). Operating income also rose 19% as margins remained robust. This is a testament to quality management.
Much of the growth was in cloud computing, where Microsoft Azure sales were up a whopping 46% YOY. In fact, Microsoft's Intelligent Cloud results have been spectacular, with revenue growing 55% and operating profits rising 82% over the past two years, as shown below. The cloud computing marketplace is vast and growing, and Microsoft is among the industry leaders.
Data source: Microsoft. Chart by author.
Still not content, Microsoft recently announced the blockbuster acquisition of Activision Blizzard for $69 billion. Activision is a game developer, publisher, and distributor best known for popular gaming franchises like Call of Duty, World of Warcraft, Candy Crush, and other household names.
Microsoft will be the world's third-largest gaming company by revenue once the acquisition is complete, and video gaming is the fastest-growing form of entertainment, according to the company. The stock's price-to-earnings (P/E) ratio is now the lowest since the March 2020 crash, so this could be a terrific time for long-term investors to consider it.
2. Intuitive Surgical is on sale
What if I told you there was a company with a growing recurring revenue stream, billions of liquid assets on hand with no debt, and is the dominant player in a high-moat burgeoning industry -- and it just happens to be trading at its lowest valuation since the March 2020 crash? Well, there is. The current market meltdown has provided a blue-light special on Intuitive Surgical (ISRG 3.12%) stock.
Intuitive Surgical is an incredibly healthy company despite the massive drawdown in its stock price. The company reported $8.4 billion in cash and investments on hand as of the end of Q1 -- an incredible 11% of the company's total value. Since the company has no long-term debt, investors are getting a massive bang for their buck here.
As the developer, manufacturer, and seller of the da Vinci robotic surgical system, Intuitive has placed over 6,920 systems worldwide and climbing. The system offers advantages over conventional surgery by enabling minimally invasive procedures. COVID-19 slowed the company's growth, but the long-term trend is positive. Our population is expected to continue aging for decades, meaning people will require more operations.
Intuitive has a razor-and-blades business model, and around 70% of its revenue is recurring. The stock is trading for a lower P/E ratio than at any time in the past five years, outside the March 2020 crash. Therefore, the stock is looking attractive for long-term investors.
3. Texas Instruments has an enticing and growing yield
Tech stocks have taken a beating lately, opening up interesting investment opportunities, like companies with excellent cash management skills and attractive dividend yields trading at historical discounts. Texas Instruments (TXN 4.52%) may be the ticket to weather the storm and beat the market over time.
Texas Instruments doesn't just make those complicated graphing calculators we remember from school. It is among the global leaders in designing, manufacturing, and selling semiconductors, or "chips." Due to recent shortages, semiconductors have been in the news, illustrating how essential they are to society.
The allure of Texas Instruments is management's laser focus on creating and utilizing cash flow. Over the past 12 months, the company produced $9.1 billion in cash from operations and $6.5 billion in free cash flow, a healthy 34% of sales.
This isn't an anomaly. The company has been growing free cash flow per share by an average of 12% annually since 2004 and has raised the dividend for 18 straight years. This means that Texas Instruments was raising the dividend during the Great Recession -- comforting, given the current economic struggles.
Texas Instruments has a current dividend yield of 3%, and it too is trading at a P/E not seen since the March 2020 crash.
Warren Buffett said to "be greedy when others are fearful," and there is plenty of fear in the market right now. During these times, it's essential to look past the noise and focus on our long-term goals. Our future selves will thank us.
