5 Stocks For The Next Decade

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

The "less is more" mantra is true in so many ways. Making fewer investments than the typical investor has helped Warren Buffett become the world's richest man (second richest man presently, according to Forbes) and greatest investor. While traders and fund managers are busy putting in hours in New York, Buffett enjoys his humble home in Omaha, Nebraska, away from all the noise. So let's escape the noise and zoom out . . . way out. I'm not interested in the best stocks for 2013, I'm interested in the best stocks for the next decade. As Buffett says, "Our favorite holding period is forever."

Making fewer investments leaves room for other things, like more research, more time to keep an eye on your current holdings, more reading, and more naps. Furthermore, fewer investments means the investor will demand greater conviction when he or she does make an investment, ultimately making better investment decisions. Buffett explained this concept best in a letter to shareholders:

We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.

No doubt circumstances surrounding a business' competitive advantage are often bound to change in ten-year periods, but investing with the intention of holding for decades is a great practice, keeping investors focused on businesses--not stocks.

To invest with decades in mind, we will need to look for wonderful businesses. A wonderful business should have favorable long-term economics, great management, and a sensible price tag. As Buffett says, "Time is the friend of the wonderful company."

eBay (NASDAQ: EBAY)

"Commerce is at an inflection point. The lines between online and offline are blurring and consumers are changing how they shop and pay," said eBay CEO John Danahoe in the 2011 annual shareholders letter. Fortunately, eBay is well positioned to take advantage of this inflection point. eBay's PayPal (38% of revenue) holds the leading role in online payment standards and is emerging as a powerhouse in offline payments as well, especially in light of eBay's recent partnership with Discover to bring PayPal to over 7 million retail locations in the U.S. In regards to sustainability, the PayPal unit is arguably protected by a very strong network effect.

With 53% of revenue coming from international sales where growth rates in e-commerce are exceeding the rates in the U.S., eBay faces tremendous upside potential. Plus, eBay's increasing focus to partner with merchants rather than compete is yet another step to protect one of the most capital efficient business models in e-commerce.

Disney (NYSE: DIS)

Disney is packed full of powerful franchises with durable competitive advantages. Even Disney's theatrical film segment offers a reliable source of profits for the company, hardly susceptible to box office flops considering the powerful film franchises from which Disney can pull from, including Pixar, Marvel, and now Lucasfilm. The rest of its business segments provide recurring and reliable revenue: cable networks, broadcasting networks, and theme parks and hotels.

ESPN is by far the largest contributor to Disney's bottom line, representing approximately 43% of operating income. Fortunately for investors, ESPN is Disney's most profitable franchise as well. Even more important, there is clear evidence that ESPN has strong pricing power:

  • Operating margins for Disney's Media Networks business segment (the segment with ESPN) are on the rise: 29%, 32%, and 38% in 2009, 2010, and 2011, respectively
  • Affiliate fees (two-thirds of ESPN revenue) grew 9% in 2011, driven primarily by an increase of 6% in contractual rates

But ESPN isn't the only Disney business segment with clear evidence of strong pricing power; every segment (except Disney's interactive Media segment, which represents a paltry 2% of revenue) has seen increasing operating margins over the last three years.

Waste Management (NYSE: WM)

Waste Management benefits from significant barriers to entry, dominating landfill ownership with over 300 sites. Plus, if the U.S takes a turn toward required recycling like many countries have in the last decade, Waste Management is poised to benefit; not only is Waste Management the county's largest waste company, it also leads the country in recycling volume. 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.

Berkshire Hathaway (NYSE: BRK-B)

With an average price target of $110 for Buffett's Berkshire Hathaway, there is room for about 22% upside. But as I discussed in a previous article, the resulting upside potential from Berkshire's recent announcement the company raised the requirement for repurchases from 110% of book value to 120% of book value has been underestimated; This commitment drastically reduces downside risk and should have a measurable impact on price targets. Berkshire and its diversified group of great businesses will endure for decades. Buffett's buying, and so should you.

BJ's Restaurants (NASDAQ: BJRI)

This small cap may come as a bit of surprise, given the leadership positions of the four companies listed above. But this restaurant's simple approach to dining and conservative and smart strategy toward expansion make BJ's a solid long-term investment. At an average check of just $13.50 per customer, BJ's is able to offer a borderline upscale experience for just $0.50 more per check than Brinker International's Chili's.

BJ's renowned, award-winning home-brewed beers and deep-dish pizza help the restaurant chain achieve above-average gross margins. With no long-term debt on the balance sheet, BJ's is in a solid position to continue to expand toward its goal of 425 restaurants from its current 130. The "fast-casual" concept hasn't affected BJ's like it has many other restaurants; BJ's book value has grown in step with Panera Bread for five years straight.

A Sensible Price Tag

With the exception of Berkshire Hathaway (discussed later), all of these companies trade at a P/E ratio over fifteen. But as you can see in the chart, these companies have traded at these levels (or higher) consistently for the last three years. So don't expect to find these companies trading at a discount anytime soon. With P/E ratios this high, a high degree of confidence in the long-term sustainability of these companies' competitive advantages is required by the investor.

EBAY PE Ratio TTM data by YCharts

 
Berkshire Hathaway, due to the nature of its franchises, is best valued in terms of price-to-book value. As you can see in the chart below, today represents a great time to hand over some money to the world's greatest investment manager and his apprentices. 
 

BRK.A Price / Book Value data by YCharts

 
The Bottom Line
 
These are five companies that come to my mind when I invest with decades in mind. Of the five investments, Berkshire Hathaway is the most sensible investment for new money, considering the low risk associated with its diversified group of franchises, a commitment from the board to repurchase shares at 1.2 times book value, and its sensible price tag. The riskiest investment of the bunch is probably BJ's restaurants, though it could very well present the largest upside potential as well. All the others fall somewhere in between. Are any of these stocks on your list? What did I miss?


DanielSparks has no positions in the stocks mentioned above. The Motley Fool owns shares of BJ's Restaurants, Berkshire Hathaway, Walt Disney, and Waste Management. Motley Fool newsletter services recommend BJ's Restaurants, Berkshire Hathaway, Walt Disney, eBay, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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