It's no secret that investing can help to grow your wealth over time and place you on solid footing for a happy retirement. Starting with just a four- or five-digit sum, you can steadily allocate more cash for your investment portfolio and reinvest any dividends you receive.
However, it's important to purchase stocks that can help you to compound your money over the years. For that to happen, you need to look out for key characteristics, include a sturdy business model with a strong competitive moat, tailwinds that can sustain for many years to come, and a capable management team that can steer the business through good times and bad.
With these factors in mind, let's look at three stocks that -- with sufficient time and patience -- can be helpful building blocks in creating a solid retirement portfolio of $1 million or more.
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Okta
Okta (OKTA -0.69%) is an identity management and authentication specialist that helps organizations manage their employees' online access needs. The business employs a cloud-based platform with a subscription-as-a-service model, with the bulk of its revenue coming from recurring subscription revenue.
With more organizations digitalizing and the need to control and manage employee access amid cybersecurity concerns, Okta is seeing healthy tailwinds that look set to grow its business further. Its financial numbers have been impressive -- revenue more than doubled from $835 million to $1.9 billion from fiscal 2021 (which ended Jan. 31) to fiscal 2023. Although Okta reported losses in these years, the business generated a positive free cash flow for every fiscal year.
Okta enjoyed a strong first half of its current fiscal 2024, with revenue climbing 23.9% year over year to $1.1 billion. Its strong free cash flow generation continued with a $173 million inflow. Management expects its free cash flow margin to rise sharply to around 15% after bottoming out at 3.5% in fiscal 2023 as the company unveiled a reduced cost structure. The number of total customers continued to climb, hitting 18,400 as of July 31, an increase from 17,600 at the end of the previous fiscal year.
Importantly, customers with an annual contract value exceeding $100,000 grew 7% over the same period to 4,205. Okta has identified multiple growth angles such as new use cases, international expansion, and an increase in the number of users as key catalysts to power its future growth. It has identified a total addressable market of $80 billion, which represents significant potential for the business to capture more market share and increase its top line.
Lennox International
Lennox (LII 0.34%) specializes in energy-efficient climate-control solutions for homes and corporations and sells cooling, heating, and indoor air quality systems. With increased demand for energy-saving equipment and a renewed focus on environmental issues, Lennox has seen its business go from strength to strength.
From 2020 to 2022, the company saw its sales rise from $3.6 billion to $4.7 billion, while net income climbed from $356.3 million to $497.1 million over the same period. Lennox also generated an average positive free cash flow of $381.3 million over those three years. Up until 2022, the company had grown its dividend by 18% annually for a decade, providing investors with a steady stream of rising passive income.
The earnings momentum has carried over into 2023 as the company reported 23.5% year-over-year growth in operating income to $418.4 million for the first half of 2023 on the back of a 3.4% year-over-year rise in revenue. Net income climbed 20.9% year over year for the first half of 2023 to $315.2 million, and the business churned out a positive free cash flow of $31.4 million.
Lennox held its 2022 Investor Day late last year and identified a total addressable market of $50 billion, of which it currently occupies less than a 10% market share, giving the company room for significant future growth.
Management sees megatrends such as climate change and organizational net-zero goals as catalysts for further growth along with regulatory requirements for energy reduction. Lennox targets revenue of between $5 billion and $5.5 billion by 2026 if its growth initiatives take root, and it's investing in a new commercial factory in Mexico that will commence production in the fourth quarter of 2024 to capture anticipated higher demand.
Deckers Outdoor
Deckers Outdoor (DECK 3.34%) designs, markets, and distributes footwear, apparel, and accessories for casual wear and exercise, and it owns a portfolio of well-known brands such as Uggs, Hoka, and Teva.
The company saw success in growing its direct-to-consumer segment as well as expanding into international markets. From fiscal 2021 to 2023, ended March 31, Deckers grew its sales from $2.5 billion to $3.6 billion, with operating income climbing from $504.2 million to $652.8 million over the same period. Net income rose in tandem from $382.6 million to $516.8 million.
The business also generated consistent positive free cash flow over all three years, with fiscal 2023 seeing a free cash inflow of $456.4 million.
The first quarter of fiscal 2024 saw the continuation of this good performance, as the company reported a 10% year-over-year rise in revenue to $676 million. Of note, direct-to-consumer net sales climbed by 35.3% year over year to $250.4 million, while gross margin improved by more than three percentage points year over year to 51.3%.
Hoka became a billion-dollar brand last year, and Deckers unveiled its first global campaign for it in June to accelerate sales growth. Hoka's revenue rose 27% year over year and hit $400 million in the first quarter of fiscal 2024, with healthy growth in the number of sales locations. Management is using an omnichannel retail strategy for Hoka by pushing sales through e-commerce channels with increased awareness and customer engagement through retail and pop-up stores.
Along with the recently released global campaign, Hoka also launched a new Mach X shoe for everyday running that's gaining significant traction. Investors can look forward to more good news from Deckers as it executes its strategy to grow sales of its key brand and refine its direct-to-consumer strategy.
