You should be looking to buy and hold your investments for 10 years or more whenever possible. In the short term, multiple things can affect stock prices, including interest rates, investor liquidity, and market sentiment. And these things are prone to turn on an unpredictable dime. But over longer periods of time, stock prices strongly correlates with a company's earnings, highlighting the need for a long investing horizon.
However, here's the problem with holding a stock for 10 years or more: It becomes increasingly difficult to predict a company's prospects. For this reason, it's also important to find stocks with staying power. And home-improvement retailer Floor & Decor Holdings (FND -1.46%), short-term rental platform Airbnb (ABNB 0.10%), and Dollar General (DG -0.36%) all fit the bill for me.
1. Floor & Decor
Floor & Decor is a home-improvement retail chain specializing in flooring -- and with 166 locations as of the first quarter of 2022. However, by 2032, management expects to have around 500 locations. And there's good reason to believe this lofty goal is achievable.
First and foremost, Floor & Decor is gaining market share by winning with professional customers. In 2021, the company's pro business surpassed $1 billion in sales, accounting for roughly 30% of its total sales. Moreover, same-store sales were up a whopping 27.6% for the year, outpacing industry growth and marking its 13th consecutive year of same-store sales growth.
Same-store sales growth demonstrates Floor & Decor's growing brand recognition and popularity. And the pro customer growth gives the company a solid (ahem) floor to stand on -- after all, pro customers will naturally make more frequent purchases than typical homeowners.
If you're looking for free cash flow (FCF) over the next few years, you might not find it in Floor & Decor. The company has decided essentially to operate at FCF breakeven and use cash to fund its expansion. The cheaper alternative is to open locations via leases. But by investing in real estate now, the company will be able to unlock superior cash flows down the road, which I believe is an astute long-term move.
Floor & Decor is financially able to absorb the higher cost of expansion. Its operating margin in Q1 was 9% -- lower than bigger chains like Home Depot and Lowe's but still respectable. Throughout 2022, management expects profits to increase thanks to some price increases in its stores. And a decade from now, once it achieves scale, I expect this to be a cash-flow machine that will greatly reward today's investor.
2. Airbnb
Airbnb is a company that needs no introduction, and this is precisely why I believe it's an unstoppable stock for the next decade. According to CFO Dave Stephenson, only around 10% of the traffic to Airbnb's portal in 2021 was the result of an ad. The rest was unaided, which is in line with historical trends. In short, consumers know about Airbnb and seek it out of their own accord.
And let's be clear: There's a lot of traffic on Airbnb's platform. In the first quarter of 2022, users booked over 100 million nights and experiences through Airbnb -- the first time the company hit the centennial milestone.
Airbnb is hitting records, but there are some near-term clouds on the horizon. For example, gas prices are up about 60% over the past year, according to AAA, which could cause people to travel less. Moreover, according to third-party research group Airdna, short-term rental occupancy was down in May, which could hurt the average daily rates for stays, reducing Airbnb's revenue.
But again, we're talking about the next decade, not the next quarter or year. 10 years from now, I would expect Airbnb -- the top brand name in this space -- to continue making the most of this trillion-dollar market opportunity. And because of its financial structure (its gross margin was high at 76% in Q1), it's capable of throwing off a lot of FCF -- $1.2 billion in Q1.
Over 10 years, Airbnb will generate substantial cumulative FCF, in my opinion. Management will need to be prudent capital allocators, to be sure. But the company will have a lot of cash for creating shareholder value. It's why I like this stock for the coming decade.
3. Dollar General
Finally, if you're looking for an unstoppable stock for the next decade, then I recommend discount retail chain Dollar General, but for slightly different reasons than Floor & Decor and Airbnb. In my opinion, Dollar General has firmly entered the early days of the returning-capital-to-shareholders stage of its business, as the following chart demonstrates.
DG Average Diluted Shares Outstanding (Quarterly) data by YCharts
And for what it's worth, this is exactly the kind of scenario that the great investor Warren Buffett often looks for in a stock. Just consider the charts of recent purchases like HP and Ally Financial as evidence. Buffett likes these opportunities for good reason. Whenever Dollar General repurchases shares, the value of remaining shares goes up. Share repurchases also increase earnings per share and give the management team more room to increase dividends.
However, Dollar General is still growing as well. It already has over 18,000 locations. But it opened 239 new stores in the first quarter of 2022 alone and has thousands more in the pipeline. And new stores aren't a drain on the company's resources because they're often cash-flow positive in the first year, meaning it makes a lot of sense to keep opening new locations as long as that's the case.
Since 2000, the best three years for Dollar General's same-store sales growth came in 2008, 2009, and 2020 -- years when there was a recession. Economists are divided about whether we're headed into a recession in 2022. However, it's fair to say that inflation is hurting disposable income, creating a potential boom in business for a value chain like Dollar General and giving investors a reason to take a look at this stock now.
Holding for a decade
Buying stocks like Floor & Decor, Airbnb, and Dollar General and committing to holding them until 2032 is not as easy as it sounds. Along the way, macro-economic fears will fluctuate, each of these companies will face challenges, and investors will second-guess their decision to buy shares during periods of underperformance.
It's hard to hold stocks for a decade because of our human emotions. But buy-and-hold is a simple method that often works because it allows time to work in your favor. You just have to overcome your emotions and commit to this proven strategy.
