You want to build your long-term investment portfolio. Holding on to a successful stock for 20 years or more could be the key to making serious money. Master investors like Warren Buffett and Peter Lynch built their fortunes through the magic of compound returns over many years -- and you can follow their example.
But don't just go buying any old stock, dear investor. You should look for certain key factors in a company to ensure you're making a wise choice.
First and foremost, you want to find companies with a strong competitive advantage. It could be their killer brand, some innovative technology, or even operating in a market that's tough to break into. Next, you want to see the company operating in a large and growing market with plenty of room for expansion. The bigger, the better! Also, strong financials are an absolute must-have. I'm talking about solid balance sheets, healthy revenue growth, a manageable debt load, and reliable cash profits.
Last but not least, keep your eyes peeled for innovation and adaptable business plans. These qualities allow the company to stay ahead of competitors and keep up with changes in the market. Without them, the business may struggle to survive in the long term.
So if you want to be a successful long-term investor, do your research and look for companies that check all the boxes of a durable winner. Let me show you two household names that fit the bill.
You can't beat the real thing
When it comes to a killer brand, Coca-Cola (KO 0.15%) has got it covered. It has one of the most recognizable and valuable brands in the world, with a long history of successful marketing campaigns.
The soft drink industry is massive and Coca-Cola has a dominant share of it. Coke controls nearly half of the domestic carbonated soft drink market. Runners-up PepsiCo and Keurig Dr Pepper split the remaining half almost evenly, leaving just crumbs for other competitors to fight over. While this market may not be growing as fast as it used to, there is still plenty of room for expansion, particularly in developing countries.
Moreover, Coca-Cola has a hand in many adjacent target markets. For example, the company manages Glaceau Smart Water and Dasani -- two of the four best-selling bottled water brands in the U.S. Coke sold its energy drink brands to Monster Beverage in 2014, but stayed invested in that market by owning 19% of Monster's stock and managing its partner's distribution. Then there are coffee-based drinks, fruit juices, non-dairy milk alternatives, and more. Name a type of non-alcoholic drink, and Coca-Cola probably owns at least one of the most popular brands in that category.
As for financials, Coca-Cola is a solid company with healthy revenue growth and consistently positive free cash flows:
KO Revenue (TTM) data by YCharts
The balance sheet carries $36 billion of long-term debt, offset by $11.6 billion in cash equivalents and liquid short-term investments. Management is comfortable with this level of financial leverage, and Coca-Cola's credit rating sits in the upper echelons of investment-grade bonds.
Overall, Coca-Cola fits the criteria I set up earlier, with a strong competitive advantage, a large and growing target market, solid financials, and a proven history of innovation and adaptability. Check, check, checkity-check.
I'll admit that the stock isn't cheap, trading just 11% below its yearly highs at 27 times trailing earnings. However, I don't mind paying a premium for a durable market leader like Coke.
The House of Mouse is no Mickey Mouse business
Let's move on to Walt Disney (DIS -1.07%) -- another household name that should add value to your stock portfolio for the next two decades and beyond.
Disney has a strong competitive advantage, thanks to its incredible brand recognition with beloved franchises like Mickey Mouse, Marvel, and Star Wars. This rich portfolio of premium story material gives it a leg up on competitors and makes it stand out in the crowded entertainment industry. Not to throw Disney's rivals under the bus, but when was the last time you got excited about the latest Columbia or Universal movie? Disney runs several studio brands that actually get fans excited about new material, sight unseen.
Next, the market for entertainment is huge and growing, with endless expansion opportunities. Disney has done a great job of capitalizing on this, with acquisitions like Pixar, Lucasfilm, Marvel, and 21st Century Fox expanding its reach and allowing it to create even more content for fans. Together with the core Disney Studios operation, these buyouts have built an entertainment colossus for the ages.
When it comes to financials, Disney also looks strong. In the recently reported first quarter of 2023, sales rose 8% year over year to $23.5 billion. Operating profits increased by 11%, right alongside the unadjusted bottom-line earnings. Trailing sales are setting all-time highs again after the dramatic dip during the theme park closings and shuttered movie theaters of the early COVID-19 crisis.
Finally, Disney is definitely innovative and adaptable. It is constantly finding new ways to reach audiences and create memorable experiences, from its theme parks and resorts to its streaming services led by Disney+ and Hulu. It has also shown the ability to pivot when necessary, as evidenced by their successful shift to a direct-to-consumer model during the pandemic.
And don't forget that legendary leader Bob Iger is back in the driver's seat after a couple of rough years under ex-CEO Bob Chapek. Iger has already reversed some of Chapek's most problematic policies. Under Iger's steady hand, I'm convinced that the media empire is back on track for a long and successful future, where the original stories behind its theme parks, cruise ships, pajamas, and lunch boxes start life in the digital streaming realm.
Disney also checks off all the boxes for a savvy long-term investment. I would gladly buy either Coke or Disney today and hold them for several decades.
