I advocate for buying and holding stocks for the long term, but 10 years is admittedly a very long time period. It can be hard enough to make an educated guess about a company's prospects over the next three to five years; a decade-long outlook is much harder.
Only with my highest-conviction growth stocks can I advocate for a 10-year holding period. And that's exactly how I feel about home-improvement retailer Floor & Decor Holdings (FND -1.46%) and e-commerce platform MercadoLibre (MELI -0.45%). These are two growth stocks for the next 10 years, and here's why.
1. Floor & Decor
There's nothing complicated about Floor & Decor's investment thesis. The company is on pace for its 14th consecutive year of same-store sales (also known as comparable sales) growth, showing the appeal of its stores, which offer more flooring options than smaller competitors or big-box rivals. With high comparables growth, stores enjoy solid profitability.
And Floor & Decor intends to increase the size of its business dramatically over the coming decade as it expands from 178 locations today to 500 long-term.
The decade-long outlook for Floor & Decor is brighter than the near-term one. Same-store sales are up 11.6% year to date, but in October they were only up about 5% year over year in a sharp deceleration. Management attributes the slowdown to do-it-yourself (DIY) customers making fewer transactions.
A slowdown in home-improvement retail feels inevitable. There's a strong correlation between DIY home-improvement spending and home values. Consider the following chart showing the monthly change in home values versus net income for The Home Depot. As you can see, there's a stronger correlation with home prices than the shaded areas representing recessions:
US House Price Index MoM data by YCharts.
I would have put Floor & Decor in the above chart, but it wasn't a public company the last time there was a downward housing trend. But we're in a downward trend now. According to the National Association of Realtors, existing-home sales fell 1.5% from August to September, marking this year's seventh month-over-month drop. And the median sale price for homes peaked in May, according to data from Redfin.
With record-high sales in its most recent quarter, Floor & Decor can be pictured as standing on a mountain; the impending slowdown in home-improvement retail is like a valley. But as CEO Thomas Taylor recently said: "We're looking over the valley. We're playing in for the long game."
There will be peaks and valleys with the cyclicality of the real-estate market. However, I'm not worried about today's valleys -- I'm investing for tomorrow's mountains. Floor & Decor plans to open 32 to 35 new stores in 2023, which should bring it close to 20% year-over-year growth. This dynamic should continue for the coming decade, boosting sales and profits. With the stock trading at one of its cheapest valuations ever, now may be a good time to take advantage of market pessimism and invest for the long haul.
2. MercadoLibre
Latin American company MercadoLibre offers its users an e-commerce portal, a shipping logistics network, financial-technology (fintech) services, advertising opportunities, and business financing. And fortunately for shareholders, many of these business segments are experiencing all-time-high demand.
MercadoLibre reported financial results for the third quarter of 2022 on Nov. 3. For Q3, the company generated record quarterly revenue of $2.7 billion. But beyond just record revenue, the company had nearly 43 million active buyers for its e-commerce platform, its highest number ever. And its fintech platform surpassed 40 million active users for the first time.
If you consider the secular growth trends for the next decade, MercadoLibre is in an exciting position. According to Statista, the number of people using e-commerce solutions in Latin America is expected to grow 20% from 2021 through 2025, and e-commerce sales are expected to almost double.
Fintech potential is also promising. According to a 2018 study by FinTech Futures, roughly 70% of people in Latin America didn't have a bank account. But according to the GSM Association, 73% of the population will own a smartphone by 2025. That's a recipe for outsized growth in MercadoLibre's MercadoPago platform.
Any company can theoretically benefit from the trends I'm describing. But MercadoLibre has a competitive advantage in e-commerce: It has a shipping-logistics network that can deliver 80% of packages in 48 hours or less, and more than half of its deliveries are being made via same-day or next-day shipping. That's something that few (if any) players can offer in MercadoLibre's markets. And it helps ensure that this company will be a major beneficiary of the trends playing out over the coming decade.
Floor & Decor and MercadoLibre might not be the flashiest companies in the world. But they are clearly serving consumers' needs, and have at least a decade-long opportunity to expand. That's why I've confidently made both of these stocks prominent positions in my own retirement portfolio.
