It's nearly impossible to project anything five years out. If it were easy, we'd all know what stocks to put in our portfolio. Ironically, however, thinking long-term is a healthy habit for stock market investors. It filters out the noise and helps investors think about the underlying fundamentals that drive businesses over the long haul. In the next few paragraphs, I'll uncover two stocks that could make some of the best investments over the next half-decade.
PC sales are declining, and smartphone and tablet sales are booming. If there's one company that is sure to benefit from this trend over the next five years, it's Apple. Yes, Apple may have lost market share over the last 12 months to Samsung, but it still captures the majority of worldwide smartphone profits. In fact, a recent study by Canaccord Genuity found that Apple took 72% of worldwide handset profits in the fourth quarter.
Another favorable factor for Apple: It is a cash cow. Even as the company's margins continue to decline, it's still adding far more money to its balance sheet than it's paying out in dividends. In 2012 alone, the company earned $46.3 billion in free cash flow on $164.7 billion in revenue. Free cash flow, of course, is equal to cash provided by operations minus capital expenditures, so this is the cash Apple generated after it took care of its operating expenses and its long-term investments.
Though 2013 may have been tough on the stock so far, analysts, on average, expect earnings to increase at about 19% annually over the next five years.
Berkshire Hathaway (NYSE:BRK-B) (NYSE:BRK-A)
The Oracle of Omaha, Warren Buffett, seems to be on his A game -- even at 82 years old. Berkshire Hathaway shares almost tripled the S&P 500's 11.8% return over the last 12 months, with a 30.1% gain. Even better, his lieutenants, Todd Combs and Ted Weschler, have both managed to outperform the S&P 500 by double-digit margins. In fact, they did better than Buffett himself, he admitted in the 2012 annual letter to shareholders.
Though it's too early to tell whether Berkshire's acquisition of H.J. Heinz will play out nicely, the outcomes of the company's major acquisitions and purchases over the last five years have in time mostly silenced the naysayers who so eagerly criticized Buffett at the time of the purchases.
A case in point is the company's largest acquisition ever: Burlington Northern Santa Fe, which it acquired in 2010 and turned out to be a significant success. In 2010, the company earned $2.45 billion; just two years later, the railroad contributed a whopping $3.37 billion to Berkshire's earnings. Since Berkshire acquired BNSF, the Dow Jones U.S. Railroads Index has more than doubled the returns of the S&P 500, snapping up a return in excess of 80%.
Berkshire isn't lacking in stock ideas, either. In 2011, Berkshire started picking up shares of IBM like nobody's business. Now Berkshire owns 6.1% of the company. The stock has gained about 15% since Buffett started buying.
The management of the well-diversified conglomerate of exceptional businesses hasn't lost its touch at capital allocation, which will ultimately be the driver of future growth.
What are your picks?
I think these could be among the best investments over the next half-decade. In fact, I've made outperform CAPScalls on both stocks. Do you think these stocks are great bets for the next five years? What are some of your favorite bets?a
Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Apple and Berkshire Hathaway. The Motley Fool owns shares of Apple, Berkshire Hathaway, and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.