Please ensure Javascript is enabled for purposes of website accessibility

2 High-Quality Stocks You Can Buy and Hold Forever

By Andrés Cardenal – Mar 15, 2016 at 8:00AM

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

Costco and Alphabet are two remarkably different companies operating in unrelated industries. However, they have one crucial characteristic in common.

When making investment decisions, having a long term horizon makes all the difference in the world. Warren Buffett is arguably the most successful investor ever, and a long-term approach to investing is one of the building blocks of his spectacularly profitable strategies. In Warren Buffett's own words: "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

Costco (COST 1.95%) and Alphabet (GOOG 6.30%) (GOOGL 6.09%) are very different companies operating in their own industries and with their own weaknesses and strengths. However, the two companies have one important characteristic in common, as they are both high-quality businesses to buy and hold for the long term, perhaps even forever.

Costco is an exceptional retailer
Discount retail has always been a particularly challenging and competitive industry, and things are getting even more complicated for brick-and-mortar operators nowadays, since they are facing a lot of pressure from online retailers. Nevertheless, Costco is a fairly unique player in the industry, and the company has the strengths to continue delivering rock-solid performance for investors under all kinds of scenarios.

Costco is the pioneer in the warehouse retail business model, meaning that the company makes most of its profits from membership fees, not margins on sales prices. This allows Costco to sell its merchandise for razor-thin profit margins, sometimes even taking a loss on a particular item. 

Image source: Motley Fool

The company is remarkably disciplined when it comes to cost savings, particularly in areas such as marketing and advertising, where many competitors typically spend considerable resources. In addition, Costco relies on smart supply chain strategies, such as purchasing merchandise directly from manufacturers and storing inventory on sales floors as opposed to using a central warehouse to generate additional cost savings. 

Customers just love the big bargains that Costco offers, and this is a key source of competitive advantage in the industry. The company consistently ranks at the top of its industry in the American Customer Satisfaction Survey, and customer retention rates are remarkably high, typically above 85%. The global renewal rate was in fact 88% last quarter, with big markets such as the U.S. and Canada showing an even higher renewal rate of 91%.

Gasoline price deflation and foreign currency headwinds are hurting the company's performance when expressed in U.S. dollars, but Costco is still delivering rock-solid figures when leaving those external considerations aside. Total comparable sales excluding gasoline price deflation and foreign exchange fluctuations grew 6% during the 24 weeks period ended on February 14, 2016 -- this is substantially better than the kind of performance other discount retailers are generating in the current retail environment.

Alphabet rules the online world
Online advertising is one of the most promising industries around. Consumers around the world are increasingly spending a growing share of their time and attention online, connected via multiple screens of different size, both desktop and mobile devices. According to a recent research report from eMarketer, digital ad spending in the U.S will reach $77.37 billion in 2017, accounting for a big 38.4% of total ad spending and surpassing TV ad spending for the first time in history.

Everything indicates that advertising spending will continue going in the same direction as consumers' eyeballs over the years ahead, and the business should offer exceptional room for growth. For investors looking to capitalize on this opportunity, no company is better positioned than Alphabet to profit from the online advertising boom over the long term.

Google is one of the most valuable and recognized brands in the world. The name is so popular that Google is even a synonym for online search to many consumers. And it's not just about the search business: the company owns seven different properties with over 1 billion monthly users each: Google Search, Android, Google Maps, Chrome, YouTube, Google Play, and Gmail.

Image source: Motley Fool.

Alphabet is also investing in several different technologies with huge disruptive potential. The company's "other bets" segment includes areas such as high-speed Internet, home connectivity, self-driving cars, and highly innovative health-care initiatives such as Calico and Verily. These projects have limited commercial viability in the short term, but they could offer explosive potential over a time horizon of several years.

Financial performance doesn't leave much to be desired. Alphabet's total revenue grew 18% in U.S. dollars and 24% in constant currency during the fourth quarter of 2015, reaching $21.3 billion over the period. This kind of growth is quite unusual among companies as big as Alphabet.

Even better, the business is widely profitable, Alphabet generates big operating margins in the neighborhood of 25% of revenue, so every dollar in sales growth is translated into a big increase in profits. As long as this trend remains in place, rapid revenue growth and sky-high profitability should drive strong returns for investors in Alphabet stock.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andrés Cardenal owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Costco Wholesale. 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.

Invest Smarter with The Motley Fool

Join Nearly 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

Alphabet Stock Quote
$100.99 (6.09%) $5.80
Costco Wholesale Stock Quote
Costco Wholesale
$539.25 (1.95%) $10.29
Alphabet Stock Quote
$101.45 (6.30%) $6.01

*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 analyst team.

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 11/30/2022.

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.