The Top 10 Stocks for 2013 and Beyond
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the past several months, I've identified 10 stocks as strong candidates for the core of any portfolio. Each of these companies is a great business, has great management, boasts a strong track record of profitability, and has the opportunity to grow thanks to competitive advantages that make each business best-in-class. Here are the Top 10 stocks:
- Chipotle Mexican Grill
- Costco Wholesale
- 3D Systems
- Canadian National Railway
- National Oilwell Varco
- Berkshire Hathaway
- Activision Blizzard
The diversity of these businesses should be apparent. Chipotle Mexican Grill (NYSE: CMG) and 3D Systems are high-growth companies with premium valuations, while Canadian National, National Oilwell Varco (NYSE: NOV), and Berkshire Hathaway (NYSE: BRK-B) are cheaply valued in large part due to the perception that these "boring" companies can't generate significant growth.
These companies have had tremendous success in recent years, as noted by the chart below:
While two of the stocks, Berkshire Hathaway and Activision, haven't outperformed the S&P's 13% return over this period, the average performance of these 10 companies has been 166% over the past five years. Since I'll be the first to admit that I didn't pick up on the greatness of 3D Systems' business until just over a year ago, it isn't completely fair to include 3D Systems' performance; excluding 3D Systems' huge gains still yields market-beating gains of 89% for the other nine companies.
How does past performance translate into future success?
Picking a list of stocks that has beaten the market in the past is simple. What is far more difficult is identifying those businesses that have the strength to leverage past success into future returns for current and future shareholders. As outlined in the individual investment theses for each company contained in the articles linked above, all 10 have passed this test.
For example, Apple (NASDAQ: AAPL) is uniquely positioned in the consumer revolution in mobile computing and home entertainment. Despite record results in the most recent quarter and tremendous opportunity for growth going forward from a variety of sources (e.g., emerging markets, new products, and continued "halo" effect), the company's stock trades at just 9 times forward earnings and a free cash flow yield of over 11% despite having $140 per share (or 30% of the share price) in cash and equivalents. With the recent pullback of over 30% from the company's 52-week high, there is a unique opportunity to own a business that is experiencing tremendous growth that doesn't even to take into account the long-rumored upcoming release of a paradigm-shifting new product.
Chipotle is another business for which the market has prematurely called for an end to the growth story. At 1,410 restaurants, Chipotle remains a long way from the anticipated market saturation point between 3,000 and 3,500 locations in the United States. Not only can Chipotle comfortably double its current domestic footprint, this target does not contemplate international growth or the expansion into different restaurant concepts. Chipotle is currently taking a deliberate approach to perfecting its recipe for success on each of these fronts, with 12 international locations and one ShopHouse Southeast Asian Kitchen. During the most recent earnings call, management indicated that the projected 165-180 new store openings during 2013 will include two new ShopHouse locations and the first Chipotle in Germany.
Meanwhile, the company continues to maintain disciplined growth while not incurring any debt; in fact, Chipotle reached over $660 million in cash and equivalents last quarter while expanding its store count and reducing the number of shares outstanding. There's also more to the growth story than just store openings. Same store sales continue to be positive despite the company not increasing prices in almost two years, plus the company is rolling out a catering service nationwide in 2013. There are additional opportunities for even more growth through breakfast and other menu enhancements (such as the Sofrita trial in San Francisco). In total, these growth opportunities and management's track record of execution more than justify the current premium placed on Chipotle's share price.
Diversity is essential
Part of the importance of a diversified portfolio is to avoid exclusive reliance on a single force such as discretionary consumer spending. While the ability to expand a franchise like Chipotle across the country or to sell iOS devices to a growing middle class in emerging market are powerful trends that have and will continue to fuel growth, it is important to diversify. It is hard to get much much diverse than Berkshire Hathaway. There aren't many companies that provide exposure to manufacturing, insurance, supply chain, energy, retail, railroad, and a number of other industries. This instant diversification is further enhanced by a strong portfolio of long-term holdings in premier companies such as fellow top 10 stocks Coca-Cola, Costco Wholesale, and National Oilwell.
In short, Berkshire Hathaway provides the diversity of a mutual fund with significant advantages over actively managed funds. Additionally, the company recently established a share repurchase program, which was subsequently updated to be triggered once the share price falls to 1.2x the company's book value. This "floor" provides significant downside protection to investors, while also further expressing management's confidence in the health of the company.
Identifying undeniable trends
Will the world continue to consume oil and gas for the foreseeable future? Whether investors like the environmental implications of this or not, the answer is "yes"! That premise is certainly reinforced by National Oilwell's 33% top-line growth and record backlog of $11.9 billion in the most recent quarter. The combination of long-term demand for oil and gas and National Oilwell's unique portfolio of products required to address this demand create a powerful investment thesis. Add in the ability to integrate accretive acquisitions in adjacent lines of business while keeping debt to a minimum, and there are plenty of reasons to be confident in National Oilwell over the long term. However, short-term margin concerns and lofty market expectations have pushed shares much closer to the lows reached during the past year rather than the highs; as a result, the company's stock trades at a forward earnings multiple of just 10 despite solid growth and an enviable competitive position in the market.
Top 10 stocks for the long term
Each of the companies in the Top 10 have strong competitive positions and businesses that are built for the long term. Long-term investors have to look beyond the short-term volatility of each of these companies and focus on the investment thesis at the heart of each business. As long as this thesis stays intact, each of these companies has a strong probability of beating the market.
In instances where the thesis is intact but the market punishes a stock due to a perceived fault in performance over a short period, a solid buying opportunity arises. This is true with the recent declines in both Apple and National Oilwell, among others. In all cases though, it is important to accumulate shares of these companies over time and good value points. This methodology focuses more on accumulating an ownership interest in these great businesses and removes the imprecision of selecting a stock at a single point in time.
I believe so strongly in this group of stocks and the arguments made in this blog series that each of the stocks referenced represent my top 10 holdings in my personal portfolio and have been rated as outperform picks in Motley Fool CAPS. To provide transparency and accountability with respect to this blog series, I have held shares in each company for over a year (and in most cases much longer) and will continue to hold shares in these companies for at least the next year. In the Foolish spirit of accountability, the performance of these companies compared to the S&P will be tracked going forward, and both successes and failures will be discussed with equal prominence.
Brian Shaw owns shares of Berkshire Hathaway, Apple, Coca-Cola, Activision Blizzard, Chipotle Mexican Grill, 3D Systems, Costco Wholesale, National Oilwell Varco, Canadian National Railway, and Diageo plc (ADR). The Motley Fool recommends 3D Systems, Activision Blizzard, Apple, Berkshire Hathaway, Canadian National Railway, Chipotle Mexican Grill, Coca-Cola, Costco Wholesale, Diageo plc (ADR), and National Oilwell Varco. The Motley Fool owns shares of 3D Systems, Activision Blizzard, Apple, Berkshire Hathaway, Chipotle Mexican Grill, and Costco Wholesale and has the following options: Short Jan 2014 $55 Calls on 3D Systems and Short Jan 2014 $30 Puts on 3D Systems. 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!