Please ensure Javascript is enabled for purposes of website accessibility

Investment Opportunities for the Next Decade

By Daniel Sparks - Apr 25, 2013 at 3:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

For the long-term investor, here are two excellent opportunities to consider.

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years," said Warren Buffett. This, of course, is easier said than done. In fact, the advice seems so naive that it's tempting to dismiss. Maybe that's why Buffett has also said, "There seems to be some perverse human characteristic that likes to make easy things difficult."

Accepting his rebuke, let's indulge ourselves in seemingly irrational long-term thinking with decades -- not years -- in mind. Finding investments that are likely to last a decade and provide handsome returns would require an investment to meet two criteria: It should be an enduring market leader with excellent economics, and it should be reasonably priced or even undervalued. Here are two stocks that could fit the mold.

Apple (AAPL -1.92%)has a significant lead on competitors in the fast-growing worldwide tablet and smartphone markets in terms of profits. Apple boasts 72% of worldwide handset profits, according to Canaccord Genuity. Based on numbers from IDC, MacDailyNews estimates that Apple's share of worldwide tablet profits could amount to a whopping 85% -- and they insist that this is a conservative estimate.

Yes, Apple's gross margin has sank considerably, down 1,000 basis points to 37.5% compared to 47.4% in Apple's second quarter from the year-ago quarter. Nevertheless, a 37.5% profit margin for an original equipment manufacturer, or OEM, is very impressive. It takes serious economies of scale and brand power to achieve a feat like this in consumer electronics. How does Apple pull this off? Brand power! Consumers are still willing to pay premium dollars for Apple's products. This trend looks enduring given the iPhone's 90% retention rate. 

Apparently, however, the Street has found better investment opportunities elsewhere. Today, the stock trades at a paltry price-to-earnings ratio close to 10, making it one of the cheapest stocks in the S&P 500. This harshly contrasts with the average analyst estimate for 20.7% EPS growth per annum for the next five years. Surprisingly, this estimate is 5% per annum higher than the average estimate for Google over the next five years. Even so, Google trades at a significantly higher price-to-earnings ratio of 24.22

Baidu (BIDU -6.67%) (aka the "Chinese Google") boasts a 73% share of search market traffic in China, according to comScore. Compare that to Google's 66.7% share of the search market in the U.S. Despite the company's massive success in China, its stock has been hit hard.

The stock is already down almost 40% during the last 12 months and, at today's price, the stock is a bargain in relation to analysts' estimates. On average, analysts expect earnings per share to grow by 25% annually for the next five years. Yet, the stock trades at just 18.2 times earnings.

Baidu's growth story isn't over. In the company's fourth quarter of 2012, net income was up 36.1%, year over year. Furthermore, active online marketing customers increased 31%, year over year -- that's double the rate of growth of new clients in the year-ago quarter.

Going against the grain
As Buffett said in his 2008 letter to Berkshire Hathaway shareholders, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." For the bargain hunters out there, these excellent companies have both taken a nosedive.

AAPL Chart

AAPL data by YCharts

Buying excellent companies at good prices is the best way to invest for the next decade. Both Apple and Baidu offer opportunities for investors to do this today. What do you think? Are Apple and Baidu great opportunities at today's prices?

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$140.36 (-1.92%) $-2.75
Baidu, Inc. Stock Quote
Baidu, Inc.
$115.73 (-6.67%) $-8.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.