The widely followed Dow Jones Industrial Average has delivered a positive return about two thirds of the time over the last century. And through all those ups and downs, the market has historically averaged around a 10% annualized return. At that rate, a $10,000 investment turns into $1.45 million after 50 years.
This is why sticking with the best companies is all you need to build generational wealth in the stock market. Market sell-offs are the ideal time to buy best-of-breed companies in their respective industries. The following are some of the world's best businesses that should deliver above-average returns for many years.
Alphabet
Shares of Google parent Alphabet (GOOG 0.84%) (GOOGL 0.73%) are down 25% year to date, which has put the dominant search provider on sale. At a price-to-earnings (P/E) ratio of 19.5 based on this year's consensus earnings estimate, Alphabet can deliver good returns for investors from this historically low valuation. Note that the average stock in the S&P 500 index has averaged around a 16 P/E ratio over the last century, which makes Alphabet look undervalued given its dominant position in online advertising.
NASDAQ: GOOGL
Key Data Points
Alphabet's Google and YouTube are as dominant in their respective markets as you could want in an investment. Monthly active users on YouTube have more than doubled over the past three years, and Google commands 92% of the search engine market. With so many people relying on Google's various apps every day, Alphabet generated $61 billion in advertising revenue last year, which comprised 81% of total revenue.
It's still producing strong growth in a challenging economic environment. Revenue increased by 23% year over year in the first quarter, primarily driven by Google Search revenue. Growth in advertising is being driven by more people searching for vacation destinations and retail shopping. Plus, as more people meet in person coming out of the pandemic, time spent on YouTube is still growing, which is driving up advertising demand from major brands.
Some investors might be worried about what a recession might do to advertising spending, but Alphabet has a cushion to survive a difficult economy with free cash flow reaching $68 billion over the last four quarters. Even if a recession pressures advertising revenue, there will still be plenty of cash to fund reinvestments in future growth opportunities, such as cloud services and artificial intelligence technology -- the meat and bones of Google.
Alphabet is an essential business that will continue to deliver solid returns for shareholders for many years.
Berkshire Hathaway
When the markets are falling, one company that stands above them all in terms of quality is Warren Buffett's Berkshire Hathaway (BRK.A +2.74%) (BRK.B +2.53%). It's the greatest collection of businesses ever assembled -- run by the most shareholder-friendly CEO in history -- and it remains a primo stock worth buying in a bear market.
NYSE: BRK.B
Key Data Points
Berkshire's class B shares are down 11% year to date, which is a noticeable outperformance compared to the S&P 500's decline of 22%. Other investors are obviously flocking to quality and safety in this environment, but Berkshire's stock still offers great value. We don't need to look at price-to-earnings ratios or price-to-book multiples to see it. Instead, we can look at Berkshire Hathaway's recent share repurchase activity -- a signal that Buffett views the stock as trading below its worth.
Since the end of 2019, Berkshire has repurchased more than 10% of its shares outstanding. As Buffett noted in his 2021 shareholder letter, "That expenditure left our continuing shareholders owning about 10% more of all Berkshire businesses, whether these are wholly owned (such as BNSF and GEICO) or partly owned (such as Coca-Cola and Moody's)."
Berkshire owns dozens of businesses outright, including Dairy Queen, See's Candies, and Fruit of the Loom. It also holds a large stock portfolio worth $390 billion at the end of the first quarter.
With the stock down year to date, investors can buy shares below where Buffett was buying at the start of the year. There is no other time when Buffett can better add value for shareholders than during bear markets, when businesses go on sale. At the end of March, Berkshire was sitting on $124 billion in cash and fixed-income investments. That gives the greatest investor of all time plenty of ammunition to go hunting for great deals.
Airbnb
The travel industry has warmed up again over the last year, and no company is benefiting more than Airbnb (ABNB +0.16%). Like Google, Airbnb has turned its name into a noun and verb. The company was started in 2007 in the founders' San Francisco apartment and now generates $47 billion in annual gross booking value from people renting places to stay around the world.
NASDAQ: ABNB
Key Data Points
Since the company's initial public offering in 2020, it's been a bumpy ride for shareholders, with the stock currently trading 30% below its IPO price. The fear is that people might cut back on travel if the economy worsens, but that's taking a very short-sighted view of the company's long-term value. Management estimates that its serviceable addressable market is nearly $1.5 trillion ($1.2 trillion for short-term stays and $239 billion for long-term stays).
Perhaps Airbnb's greatest strength is its large base of four million hosts that list their properties for rent on the platform. This provides Airbnb plenty of supply to meet a surge in travel demand. That is one reason the company has been able to post such strong growth in gross booking value. In the first quarter, gross bookings were up 73% over the comparable quarter in 2019.
The stock trades at 10 times the company's trailing 12-month sales. That might look expensive, but historically, fast-growing companies that can earn high margins are rewarded with a similar valuation. This is a top growth stock to consider buying during the bear market.
