Most investors know the potential benefits of leaving their winning stocks alone. While stocks can only fall to zero, there's no hard ceiling on how high a stock can climb. The growth in a long-term winner can often dwarf losses elsewhere in a portfolio.
Billionaire investor Warren Buffett put it well in 2023 in a letter to Berkshire Hathaway shareholders: "The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders" for your returns.
It therefore makes sense to look at the universe of highly successful stocks as fertile ground for your next stock buy. Among those rallying investments with plenty of room to run, Microsoft (MSFT +3.84%) and Costco (COST +0.88%) belong near the top of your watch list.
Software is king
Microsoft is already the biggest of the "Magnificent Seven" stocks -- and the world's largest public company -- but the tech giant could continue its remarkable growth streak over the next few decades. Consider just the enterprise software services segment that's anchored by its Azure platform. Microsoft has a strong foothold in this niche, with sales expanding 28% in the most recent quarter. That's better than the results Amazon achieved in the same period with its AWS platform.
NASDAQ: MSFT
Key Data Points
Both companies are poised to capitalize on the trend of more businesses migrating their digital operations onto the cloud over the next several decades. And thanks to switching costs and efficiencies of scale, this is an example of where winners like Microsoft can just keep on winning. Look for Azure contracts to keep growing in length and in the size of their annual revenue commitments. It's a highly profitable business, too, as you can tell from Microsoft's blazing 44% profit margin.
Wall Street is bullish about the company in the short term, with most Wall Street pros looking for sales to rise 15% when the software giant reports its fiscal 2024 Q3 earnings in late April. That would be a 15% increase for a company that already generated a record $227 billion in trailing-12-month revenues. More growth in cloud services, in addition to other areas like cybersecurity, video games, and consumer tech, will pave the way for Microsoft to set sales records well past 2030.
Joining the club
The retail world is a famously difficult industry if you're aiming for sustainable profit growth, but Costco isn't your average retailer. The warehouse giant earns most of its profits from membership fees rather than through volatile merchandise sales. Costco's membership income arrives with incredible regularity since a record 92% of its members are renewing their annual commitments these days. That success should make it easy for the chain to (potentially) raise its fees in the near future, which it hasn't done since 2017.
The chart of its earnings growth over the years shows off the power of its membership-centric selling approach. Costco has boosted its annual profits by 240% in the past decade, with no significant downturns. Contrast that with Walmart and Target, both of which have seen weaker growth and much more volatility over that time.
COST Net Income (TTM) data by YCharts.
Costco's stock isn't cheap right now. Its premium is roughly double what you'd pay for either Walmart or Target, in fact. That's the advantage of looking out several decades for your investing thesis, though. In several years, you might not remember that you bought Costco or Microsoft at premium valuations compared to their less successful peers. But you'll likely be thrilled to have had these winners in your portfolio while they added to their already impressive market share positions.
