What are the Best Stocks for the Next Five Years?

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Dow Jones industrial average recently pulled back from 15,500 to 14,852 before recovering back to 15,227. Over the past couple week’s market experts were speculating on a recession, but now those same market experts are talking about new highs in the stock market. This is typical behavior; bears come out in every market pullback just to be reined in by a positive wave of buying. The bulls start talking about higher levels every time the market recovers. It is just the way it is.

Going forward investors need to stick with their own investment thesis, especially during periods of volatility. Everyone has an investment thesis. Some believe in value, others believe in growth, and some believe in a mix. What matters is that investors invest with the mindset of long-term growth. The best strategy to counter long-term volatility is the long-term accumulation in a stock rather than a gimmicky tactic of day trading.

Three stocks that I like

In general, I prefer stocks that have a healthy mix of value, growth, and income. The stocks I pick don’t excel at any of the three categories, but provide enough of each to make it a worthwhile investment opportunity.

Investors should stay the course with Apple (NASDAQ: AAPL), Procter & Gamble (NYSE: PG), and Wal-Mart (NYSE: WMT)

Apple a solid investment

Anyone who recommends Apple is starting to sound like a broken record. I know it gets old, but we have to stick to basics. Investing doesn’t always need to be complicated.

The company’s brand is the most powerful in the world, according to Forbes. The hidden component to Apple’s pricing premium is the way consumers perceive the brand. The perception surrounding Apple is a mix of luxury, refinement, style, uniqueness, creativity, and class.

Apple’s unique content and product ecosystem makes it easier for users to upgrade, and use applications across the iMac, iPad, and iPhone. Those with an Apple ID have a built-in advantage as it lowers the cost and standardizes the Apple experience across all form-factors of computing. This is going to be increasingly important for users as every other product ecosystem isn’t as cross compatible as Apple's, with the exception of Microsoft.

Apple trades at a 10.4 earnings multiple, which is reasonable considering the 20.9% average growth rate over the next five years. The growth is likely to be sustainable considering the high rates of growth projected for both smartphone and tablet devices by various sources like IDC and Gartner. The company also compensates its investors with a 2.8% dividend yield, which is more generous than Treasury bond yields. The company is also buying back $60 billion worth of shares, which will limit the share float thus stimulating demand for the remaining shares.

Retail is a winner

Wal-Mart is a compelling investment going forward. Recently the company announced that it would be hiring more temporary workers in order to offset the lack of labor during peak hours of business. The company is hoping to improve upon the shopping experience while keeping in mind its fiduciary duty to its shareholders.

One of the main reasons why I like Wal-Mart is that it’s remarkably consistent, and it upholds its values better than most company’s often do. The company’s every-day-low-price strategy isn’t immensely popular because it has closed a lot of small businesses, but there’s no denying that everybody likes inexpensive things.

Analysts on a consensus basis anticipate the company to grow earnings by 9.3% on average over the next five years. The company trades at a 14.8 earnings multiple, which is reasonable considering the historical consistency in the way the business is run. The company never fails to grow earnings even through the great recession. Let’s not forget the stock has extremely low volatility (0.3 beta). The company compensates investors with a 2.5% dividend yield, which is much more generous than the 10-year Treasury bond.

Consumer goods

Procter & Gamble is one of the most defensive stocks in the world. The company’s management team believes that it can sustain earnings-per-share growth through a mix of share buybacks, international expansion, new product ideas, and cost-cutting.

The company projects that between 2010 and 2020 the middle class will increase by 1.4 billion people, and 98% of that growth will come from developing markets. The company also projected that the world population will grow by 700 million people from 2010 to 2020. Demand for basic consumer goods like toothpaste, shaving cream, toilet paper, mouth-wash, laundry detergent will rise based on the macroeconomic trends. The company is heavily focused on growing its brands and product presence in emerging market economies, which will pay-off in future years.

The company believes that it can generate $10 billion in added earnings from cost-cutting efforts by 2016. The company plans to cut $6 billion in cost of goods sold, $3 billion in overhead, and $1 billion in marketing expenses. The company currently earns $10.8 billion, so if it is able to add an extra $10 billion in net income from cost cutting, P&G could double its earnings per share.

The company trades at a 20 earnings multiple. The high earnings multiple comes from the built-in expectation of high rates of growth (there’s the potential that earnings could double by 2016.) The company also compensates its investors with a 3.1% dividend yield.

Conclusion

The three companies are projected to grow earnings, pay a dividend, and trade at reasonable earnings multiples. Going forward, these stocks are likely to out-perform the broader stock market.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple and Procter & Gamble. The Motley Fool owns shares of Apple. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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