Latin American e-commerce giant MercadoLibre (MELI -0.45%), law enforcement technology company Axon Enterprise (AXON 1.27%), shoe maker Crocs (CROX -1.80%), equipment rental provider United Rentals (URI 5.45%), and retail landlord Tanger Factory Outlet Centers (SKT 0.07%) are five stocks I believe can beat the market over the long haul. And my money is where my mouth is; these five stocks combine to account for 32% of my personal retirement portfolio.
Below is an explanation of why I own each stock for the long haul. Percentages are the value of each position compared to the value of the entire portfolio, as of Dec. 2.
1. MercadoLibre: 7.7%
Surprisingly, I only started buying MercadoLibre stock in 2022. But I admired it from the sidelines for years. I was always uneasy with its valuation. But in 2022, the stock fell to its lowest price-to-sales (P/S) multiple ever, even though its future remains bright. And this was enough to get me off the sidelines and quickly build it into my largest position.
MELI PS ratio, data by YCharts.
As of the end of the third quarter of 2022, MercadoLibre had $945 million in property and equipment assets. And it has invested $342 million year to date in these areas. Much of this relates to the company's logistics and infrastructure for e-commerce, which is a real competitive advantage in my opinion.
According to management, 80% of items can be delivered in under 48 hours, which is hard to match. Indeed, rival Sea Limited reportedly exited some MercadoLibre markets earlier this year as the company focuses on cash flow. Building out infrastructure is expensive, especially when MercadoLibre has a big lead.
The trends for e-commerce and financial technology in Latin America are in MercadoLibre's favor. I believe these tailwinds can lift the stock to market-beating performance. And its logistics advantage and low valuation make me comfortable holding this as my largest position.
2. Axon Enterprise: 7.6%
By and large, law enforcement agencies aren't looking for short-term answers to their problems. That's why some of the contracts they sign with Axon extend out 10 years. And ever since the company adapted its strategy to better align with its customers' needs by offering its Tasers, body cameras, and software as a package deal in 2017, the stock has soared.
There are significant barriers to entry with a business like this -- you can't trust just anybody with sensitive information. This is partly why I believe Axon is a safe stock to invest in for the coming decade. For example, when it comes to national security, the company's cloud is the only one certified by the Federal Risk and Authorization Management Program. This is just one example of its trustworthiness at the federal level. And it's why the company has won $200 million in business from federal agencies in 2022 alone.
Federal agencies represent an emerging customer base for Axon; it has traditionally dealt with local and state law enforcement. And this is another reason to like Axon: It keeps expanding its addressable market. Management believes its products can be used by security personnel and corrections officers. It has even developed software to automate judicial paperwork.
At the end of the third quarter of 2022, Axon had a record backlog of over $3.7 billion, called remaining performance obligations. It's worth noting that this is up 12% quarter over quarter and up a whopping 56% year over year. The company is winning business in tough industries and is locking in customers for the long haul. It's why I still like it today.
3. Crocs: 6.5%
OK, I'll level with you. I don't wear Crocs' shoes and I don't really understand them as a fashion trend. But I don't need to. Apparently, millions of people love them, and that's what matters. The opinion of the masses is more meaningful than my personal preferences.
According to Comparably, a website that compares and rates workplaces and brands, Crocs is the 50th most popular brand among Gen Z consumers. And it has a net promoter score (NPS) of 43. For perspective, the NPS scale goes from negative 100 to positive 100. And a dominant brand like Apple only ranks slightly higher than Crocs with an NPS of 52.
This growing popularity is driving higher sales. And growth in the Americas in particular is delivering incredible profit boosts for Crocs. From 2019 through the end of 2021, revenue in the Americas jumped 151% from $641 million to $1.6 billion. And the company's operating margin is better in the Americas than in other regions, which has sent profits soaring.
CROX revenue (TTM); data by YCharts. TTM = trailing 12 months.
I believe that Crocs can keep growing in popularity in the U.S. and keep increasing revenue in this market through the acquisition of rival shoe company Heydude. Citing a survey from Piper Sandler, Crocs' management points out that Heydude is now the seventh-most-popular footwear brand for teenagers.
Heydude's financial results certainly bear this out. In the third quarter of 2022, revenue for the brand was $269 million, up a whopping 87% year over year. This momentum will certainly help Crocs' growth in coming years.
Crocs' management believes its popularity will keep it growing, and it's targeting over $6 billion in revenue in 2026. For perspective, it generated just $2.3 billion in 2021 -- that's a target of 160% growth in just four years. This leads me to believe that it's not too late to buy Crocs stock, even though it has already more than doubled from June lows.
4. United Rentals: 5.8%
Of the 33 stocks in my diversified portfolio, 17 have a higher cost basis than my United Rentals position. But United Rentals is in the top five for value because it's one of my best performers, gaining 130% compared to the 24% return of the S&P 500 since I purchased shares.
United Rentals stock is up more than 750% over the past decade, trouncing the market. Its recipe for these market-beating gains contains simple ingredients. The company has grown revenue by taking market share in the fragmented rental space and by acquiring other companies. Management watches expenses to keep free-cash-flow (FCF) generation high. And it uses cash flow to repurchase shares, as the chart below shows.
URI revenue per share (TTM); data by YCharts.
I expect United Rental's management will keep cooking this recipe for shareholders in 2023 and beyond. At the end of the third quarter of 2022, management announced that it was going to repurchase $1.5 billion in shares over the following five quarters. However, it then paused this repurchase program in order to jump at the opportunity to acquire competitor Ahern Rentals for $2 billion.
At the end of the third quarter, United Rentals was the largest equipment rental company in North America, but it only had 15% market share. Ahern Rentals allows it to grow market share by gaining Ahern's 106 stores, and increase revenue. That makes it immediately accretive to its FCF. Management will get back to repurchasing shares once it pays down some of the debt related to this acquisition.
I expect this formula will keep working for United Rentals' shareholders for the foreseeable future.
5. Tanger Factory Outlet Centers: 4.6%
Lastly, I bought shares of Tanger Factory Outlet as a dividend investment. And I liked it over other potential dividend investments because its payout is down almost 40% from its high. That sounds like a strange approach to a dividend investment, but let me explain.
SKT dividend; data by YCharts.
Tanger owns outlet malls and leases spaces to retail companies to generate revenue. And as a real estate investment trust (REIT), the company is legally obligated to pay out 90% of taxable earnings as a dividend.
Funds from operations (FFO) is another profitability metric for REITs. In 2019, Tanger had FFO of $2.27 per share. And it paid 62% of FFO as dividends.
However, the pandemic hurt brick-and-mortar retail companies, and Tanger consequently suffered as well. In 2020 and 2021, the company had FFO per share of just $1.58 and $1.29, respectively, down sharply from 2019. And it only paid out 45% and 55% of its FFO as dividends those years. That's why the dividend, and the stock, is down.
As we move further beyond the start of the pandemic, retail companies and Tanger are improving dramatically. Year to date, FFO for Tanger is up 63% from the comparable period of 2021. Management has raised the dividend some as results have improved. But it's still only paying out 43% of FFO so far in 2022. Therefore, it looks like future dividend increases are just around the corner with FFO surging back toward pre-pandemic levels.
By buying Tanger stock while it was down, I locked in a low cost basis for a dividend that looks set for a full eventual recovery. And it's why I keep holding Tanger stock, along with the other four mentioned here, for 2023 and beyond.
