It's been a trying year for the investing community. Since hitting their respective all-time closing highs within the past seven months, the well-known Dow Jones Industrial Average, benchmark S&P 500, and growth-dependent Nasdaq Composite have lost 19%, 24%, and 34% of their value, as of June 16, 2022.
Although big declines in the stock market can be worrisome, historical data shows that buying during these dips is a genius move. Over long periods, every notable decline in the major U.S. indexes has eventually been wiped away by a bull market. The key to success, aside from buying stakes in innovative, high-quality businesses, is allowing time to work its magic.
Image source: Getty Images.
With equities significantly below their all-time highs, a number of innovative companies stand out as amazing values for patient investors. What follows are five surefire stocks that have the ability to build generation wealth over the next 25 years.
Intuitive Surgical
To begin with, robotic-assisted surgical system developer Intuitive Surgical (ISRG 6.67%) offers significant wealth-building potential for long-term investors thanks to its lasting competitive advantages.
When the first quarter came to a close, Intuitive Surgical had installed 6,920 of its da Vinci surgical systems in hospitals and surgical centers worldwide. This figure is many multiples higher than its next-closest competitor. But what's far more important to recognize is that the cost of these systems, coupled with the training given to surgeons to operate them, makes it highly unlikely that customers would ever switch to a competitor. Da Vinci system buyers effectively become a long-term cash stream for the company.
Intuitive Surgical's razor-and-blades operating model is its other big selling point. Although its surgical systems are costly, they're intricate to build, and therefore produce only mediocre operating margins. As the installed base of da Vinci's systems has grown, the percentage of sales from instruments sold with each procedure, as well as system servicing, has grown. These segments generate considerably higher operating margins and are what can propel Intuitive Surgical's valuation much higher over the next quarter century.
NYSE: BRK.B
Key Data Points
Berkshire Hathaway
For more than 50 years, few investments have been more "surefire" than riding the coattails of billionaire investor Warren Buffett. Since becoming CEO of Berkshire Hathaway (BRK.A +0.32%)(BRK.B +0.65%) in 1965, the Oracle of Omaha has led his Class A shares (BRK.A) to an annualized return of 20.1%, through Dec. 31, 2021. On an aggregate basis, we're talking about a return of 3,641,613%.
One of the biggest reasons for Berkshire Hathaway's overwhelming success is Buffett's affinity for loading his company's investment portfolio with cyclical businesses. Buffett is well aware that it's impossible to predict when a recession might occur. But he does realize that periods of economic expansion last substantially longer than recessions. By investing in sectors he knows well, and buying stakes in businesses that'll benefit from long-winded expansions, he's set his company up to thrive off of the natural growth of the U.S. and global economy.
Berkshire Hathaway's historic outperformance also looks to be a function of its mountain of passive income. Over the next 12 months, Buffett's company is on pace to collect north of $6 billion in dividend income. Dividend stocks have a lengthy track record of outperforming their non-dividend-paying peers; and Buffett tends to hold these dividend-paying stocks for years or decades at a time.
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Mastercard
A third surefire stock with the capacity to generate life-changing wealth over the next quarter century is payment processor Mastercard (MA +0.49%), which I'll add is a Berkshire Hathaway holding.
Mastercard is the perfect example of how long-term investors can play a simple numbers game and come out as winners. Though recessions usually result in lower spending by consumers and businesses, economic contractions typically don't last long. Mastercard benefits from disproportionately long periods of economic expansion and the higher spending that accompanies them.
It's equally important to note that Mastercard strictly acts as a payment processor and not a lender. Despite having the opportunity to collect interest income and fees, becoming a lender would expose it to loan delinquencies and charge-offs during periods of economic weakness. Not having to set aside capital is the big reason Mastercard bounces back from recessions faster than most financial stocks.
As a final note, most global payments are still being conducted in cash. This gives Mastercard a sustainably long runway to push its payment infrastructure into underbanked regions and faster-growing emerging markets.
NYSE: ETSY
Key Data Points
Etsy
Assuming it doesn't get acquired, specialty e-commerce retailer Etsy (ETSY 7.18%) has all the tools and intangibles necessary to build life-changing wealth in the next 25 years.
Whereas most online retail platforms are built solely for volume and lack much in the way of personalization, Etsy's retail platform is designed with engagement in mind. The company's merchant network is almost entirely small businesses that produce unique or customizable products. While considerably larger e-commerce players exist, none is a direct competitor to what Etsy can offer from a personalized/customized standpoint.
The other impressive aspect has been Etsy's ability to transform casual shoppers into habitual buyers. A "habitual buyer" is a term used by the company to describe someone who makes at least six purchases totaling $200, in aggregate, over the trailing-12-month period.
Between the end of 2019 (i.e. before the pandemic) and end of 2021, the number of habitual buyers on the platform grew by 224%. This increase is what's allowing Etsy to charge merchants higher fees for advertising and analytics, and is a testament that investments in its platform designed to drive user engagement are working.
NASDAQ: GOOGL
Key Data Points
Alphabet
Lastly, even though it's already one of the world's largest public companies by market cap, Alphabet (GOOGL 2.98%)(GOOG 2.62%) is a surefire stock that can build generational wealth over 25 years. Alphabet is the parent company of internet search engine Google and streaming platform YouTube.
The company's foundational segment is Google, which has pretty consistently grown its sales by a double-digit percentage for the past two decades. Based on trailing-12-month data provided by GlobalStats, Google accounts for 91% to 93% of worldwide search engine market share. If businesses want to reach users, they're well aware that paying a premium to advertise with Google is their smartest option.
But what's even more exciting for Alphabet is the growth of its ancillary segments. The aforementioned YouTube is the second most-visited social site on the planet. Meanwhile, cloud infrastructure service provider Google Cloud ranks third in global cloud spending. Google Cloud has been growing sales by roughly 45% to 50% annually, and cloud service spending is still, arguably, in its early innings.
Taking into account that cloud service operating margins can leave advertising margins in the dust, Alphabet's operating cash flow could take-off by mid-decade.
