Why does long-term investing rule? Because it makes seemingly lofty goals very doable. Suppose you wanted to invest $3,000 and double it. That's very hard to do in a year or two because stocks are unpredictable in the short term.
But over time, fundamentals tend to steer the boat. It also breaks the math down. Doubling your money by 2030 requires a 12% annual return (average) for the next six years -- much more doable, right?
In other words, find a quality business. Buy the stock at a solid price, and wait. That's it.
Here are two stocks that fit the bill.
1. Alphabet
NASDAQ: GOOGL
Key Data Points
Internet company Alphabet (GOOGL 0.31%), a member of the "Magnificent Seven," has already created immense wealth for its shareholders over the past two decades. Today, the company is a cash flow machine that follows a straightforward recipe for steady earnings growth. Its golden goose is its advertising business. The Google search engine and the video platform YouTube are the Earth's two most visited sites. It's a vast audience, and it monetizes very well.
For every revenue dollar Alphabet brings in, roughly $0.30 winds up as free cash flow, cash profits it can deploy as it pleases. The company has generated $77 billion in cash flow over the past year and sits on $120 billion in cash on its balance sheet. Management loves repurchasing shares. The number of outstanding shares has declined by 10% over the past five years. Fewer shares help increase earnings-per-share (EPS), supporting share price growth.
GOOGL PE Ratio (Forward) data by YCharts
Alphabet's cash hoard all but ensures that management will continue propping up its organic growth with repurchases moving forward. Analysts believe the company's earnings will grow by an average of more than 17% annually over the long term. This clears our targeted 12% by five percentage points, a margin of safety for owning the stock.
Additionally, shares trade at a forward P/E of 24, which isn't a bargain but arguably a fair value given the expected growth rate. That's a PEG ratio of 1.3. I consider anything under 1.5 attractive, so unless Alphabet's fundamentals deteriorate, investors should realize enough of the company's growth as investment returns to hit the needed 12% to double their investment by 2030.
2. Netflix
NASDAQ: NFLX
Key Data Points
Streaming pioneer Netflix (NFLX +0.07%) has been one of Wall Street's best performers since the stock went public in the early 2000s, appreciating more than 39,000%. No longer the small, emerging lottery ticket it once was, Netflix carries a $210 billion market cap today. Netflix has approximately 247 million paying subscriptions worldwide.
It lost money for years, investing to produce its content portfolio so it wouldn't rely on third parties (often its competitors). Today, Netflix owns much of what you see when browsing the platform. Its content has even won Emmy and Oscar awards. Finally, Netflix's profits have outrun its production budget, and the company is a cash cow today. Its $5.6 billion in free cash flow over the past four quarters is a strong 22% conversion rate.
NFLX PE Ratio (Forward) data by YCharts
Netflix stopped allowing password sharing in 2023, and its subscriber growth has accelerated once again. Additionally, Netflix has other growth levers to pull, including international expansion and price increases. Can Netflix someday have 400 million subscriptions? 600 million? It's possible as emerging markets develop the discretionary income to afford streaming. Netflix is in over 190 countries, so it's more about penetrating these markets over the coming years.
Analysts also believe the future is bright. Consensus estimates for long-term earnings growth average over 23% annually. Even at a forward P/E of 39, a PEG ratio of 1.6 (a touch expensive) leaves room for Netflix's valuation to come down some and still hit 12% annualized investment returns. Nothing is guaranteed, but Netflix seems like a realistic candidate to double up by the decade's end.
