Editor's Choice

5 Great Stocks For The Long Haul

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

It's always a good idea to hold a few core stocks in your portfolio that you can count on to continue "business as usual" for years to come. Warren Buffett famously articulated this idea, saying, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Great companies lead to lower turnover for your portfolio, and less stress for you, because they can dependably create value over the long term. Businesses with one or more of the following characteristics could make a good candidate for a core holding in your portfolio:

  • Customer "stickiness" (high switching costs)
  • Barriers to entry
  • The network effect
  • Cost advantage
  • Intangible asset (meaningful patents, powerful brands, rare government approval)
  • Efficient scale
Businesses that posses one or more of these characteristics often possess a wide economic moat, or a durable competitive advantage. But you'll get the most mileage for your money if you can snap up companies like these at a reasonable price -- if not even cheaper. Let's examine a few examples.
Union Pacific Railroad (NYSE: UNP)
Government approval for rail expansion is a complex and time-consuming process. This intangible asset gives railroads like Union Pacific nearly insurmountable barriers to entry. Better yet, it's three times more fuel-efficient to transport freight by rail than on the highway. This eco-friendly profile will only further benefit Union Pacific and its investors as highways become more crowded as the U.S. population continues to expand.
Waste Management (NYSE: WM)
Waste Management benefits from significant barriers to entry, dominating landfill ownership with over 300 sites. Absolute numbers of landfills across the United States are actually shrinking as environmental standards become more strict. Government permission for a landfill, therefore, is an intangible asset in and of itself. Waste Management's dominance and scale results in industry-leading revenue, pricing power, and record profit margins that will continue to reward investors with significant dividends for years to come.
International Speedway (NASDAQ: ISCA)
The France family who owns NASCAR also owns 70% voting rights to International Speedway, suggesting that the company's NASCAR contracts won't be speeding away anytime soon. And fortunately for International Speedway, NASCAR only needs one major raceway in each regional area; anything more would be unnecessary and cumbersome. This is a perfect example of a company that benefits from efficient scale: It makes economic sense for NASCAR to limit the number of raceways, which results in a more efficient operation for International Speedway, and higher returns on invested capital for investors.
The more people that use eBay, the more effective the online auction market becomes. This network effect will benefit investors as eBay continues to benefit from the growing number of online shoppers. eBay's first-mover advantage, combined with solid strategic execution, have rewarded its investors with an online marketplace that can be counted on for decades.
Berkshire Hathaway (NYSE: BRK-B)
Berkshire Hathaway is full of companies with wide moats. In fact, Berkshire's chairman, Warren Buffett, coined the term "wide economic moat." Consider one of Berkshire's largest stock holdings: IBM. IBM has "sticky" relationships with big corporate clients; its IT services result in long-term strategic relationships that often deal with many complex enterprise applications. Of course, Berkshire Hathaway also owns Burlington Northern Santa Fe Railroad (we discussed the wide moat benefits of railroads above). Berkshire's diverse portfolio of wide-moat businesses and deep bench of top-notch executives running its subsidiaries will continue to reward investors over the long haul.
Yes, but are they cheap?
Even though these are all great companies, their prices still matter. It will be difficult to ever find companies like these trading at a bargain, but investors should at least demand a reasonable price. One great indicator of price is the free cash flow yield, which shows you what percentage of a company's share price is represented by the cold, hard cash it's churning out. The higher this percentage, the better:

<img src="http://media.ycharts.com/charts/c32a7425d19903cd51040bbb17c11208.png" />

UNP Free Cash Flow Yield data by YCharts

According to the above chart, Waste Management and International Speedway obviously look the cheapest in terms of free cash flow yield. For the investor who gets queasy forecasting future growth, these would be great buys. The lower free cash flow yields of the other three companies, however, means that growth is priced into the stock. If a closer look at these companies reveals growth catalysts that merit their premium valuation, they could further represent buying opportunities for investors comfortable with forecasting. But ensure your forecasts are conservative: Getting burned by overzealous forecasts is a common mistake on Wall Street.
The bottom line
A closer look at any of these companies could very well reveal a compelling investment opportunity for the long-term investor. Though wide economic moats are definitely worth paying a premium, price is still a factor. After you discover the source of their economic moats and recognize their value, carefully decipher whether or not their current price makes sense or not -- maybe you'll discover one that's right for you. Owning wonderful businesses with wide economic moats that you can depend on for decades can create a great core for a long-term investor's portfolio.

DanielSparks has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway and Waste Management. Motley Fool newsletter services recommend Berkshire Hathaway, eBay, International Speedway, and Waste Management. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus