4 Stocks for the Long Run
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According to Ben Graham, there are two types of people who deal in the stock market: the speculator and the investor.
Speculators are like gamblers spending their days at a computer trying to zig the daily price zags of the stock market, treating it like a day at the race track, and diluting gains (if any) with brokerage commissions and capital gain taxes.
Investors, on the other hand, want to own the business behind the ticker for the long term. Their favorite holding period, in Warren Buffett’s words, is “forever.” According to Buffettology, investors look for enterprises with high barriers to entry (a wide moat), few competitors, and “toll bridge operators” (companies on which other businesses and consumers rely to survive). Here are four companies that investors can hold for the long-term.
Walt Disney (NYSE: DIS), a company founded by Walt Disney nearly a century ago, started out as a producer of cartoons surrounding characters such as Mickey Mouse, Donald Duck, and Goofy, and grew into the multi-billion dollar entertainment conglomerate we all know today. In recent years, Disney has positioned itself as a sci-fi and fantasy powerhouse, and now, other studios' “go to” company for special effects.
The Pixar acquisition gave Disney the ability to produce fresh new animated films that go beyond the traditional Disney characters. The acquisition of Marvel gave Disney ownership of a whole universe of characters on which to base movies, comics, and toys. The more recent acquisition of Lucasfilm not only gave Walt Disney ownership of arguably the greatest sci-fi saga of all time, Star Wars, but also access to Lucasfilm’s state-of-the-art Industrial Light & Magic, the special effects shop often employed by Disney and its competitors in making sci-fi and fantasy films.
Demographics also come into play when looking at Disney’s future. Generation Xers, a demographic overlooked by the media, grew up watching Star Wars and collecting Marvel comics. Nostalgia hasn’t faded as this group grows older, and Disney wants to capitalize as this generation advances professionally and gains affluence. Gen Xers are willing to spend money on tickets to Marvel and Star Wars films, as well as the subsequent books and toys surrounding them.
Recent market jitters stemming from a decline in Disney’s advertising revenue due to the elections sent this stock down roughly 6% to around $47 per share; however, a forward P/E of 12 gives this stock a better entry point.
Union Pacific (NYSE: UNP) fits the classic definition of a company with a wide moat, few competitors, and toll bridge status. Union Pacific, a railroad company operating exclusively in the west, owns a vast and expensive railroad infrastructure that few companies can afford to build. Union Pacific only lists Berkshire Hathaway’s Burlington Northern Santa FE as a competitor. If a business has a product they want to ship quickly and efficiently across the vastness of the American west, Union Pacific provides one of the few choices to do so.
Union Pacific has a diverse revenue stream. Its growth in the automotive, chemical, and inter-modal segments more than offsets the decline in its coal and agricultural segments. It pays to have diversity, even in a single stock.
Union Pacific’s stock price of $122 per share gives this company a forward P/E of 13, making this company a cheap buy.
Global beverage company Coca-Cola (NYSE: KO) makes and bottles traditional sodas such as Coca-Cola, Sprite, and Fanta. It also produces market leading “non-sparkling” brands, such as Dasani bottled water and Minute Maid orange juice.
Coca-Cola possesses a wide moat, and the company has few large scale competitors. A vast distribution network, brand name recognition, and the hard to duplicate taste of its sodas make it difficult for competitors to produce a comparable quality product at a cheap price. Certain chain restaurants serve only Coca-Cola products. Coca-Cola possess so much market share that retail chains feel compelled to carry them or lose a significant chunk of business.
Coca-Cola has a solid future. Its CEO offers clear goals for doubling system revenue and expanding margins in his “Vision 2020” plan. The company is also facing challenges from the healthy lifestyles movement head on with education and marketing of “healthy” non-sparkling beverages such as bottled water and juices. Coca-Cola’s robust growth in its non-sparkling segment compliments its slower growth in the traditional soda brands.
Coca-Cola’s stock price has declined roughly 9% from its 52 week high of $40, as of this writing, giving it a forward P/E of around 17. This fairly-valued company has significant upside potential.
McDonald’s (NYSE: MCD), a global restaurant with over 30,000 locations, makes eating out more convenient throughout the world. Only one other restaurant company operates on the scale of McDonald’s, and that’s Yum! Brands. McDonalds' golden arches give the company unique brand recognition that can’t be duplicated. McDonald’s provides high quality food at low prices and introduces new products to keep consumer interest.
McDonald’s recently experienced a global decline of 2% in its same store sales due to increased competitive pressures from Wendy’s, Burger King and Yum! Brands, pounding McDonald’s stock price down to around $85 per share as of this writing. McDonald’s owns the resources to overcome the slump. The balance sheet in its most recent form 10-Q indicates the company has more than $2 billion in cash. Its forward P/E of 15 represents a good entry point for this stock.
Unique brand names, expensive infrastructure, and few competitors give these companies superior long term growth potential. No one can create another Star Wars. Not too many companies can build the thousands of miles of rail infrastructure in Union Pacific’s possession. McDonald’s brand name recognition and high quality food will make McDonald’s a premier stopping place for fast food for years to come. Companies like these can be bought and held for decades, adding to your wealth along the way.
stockdissector has positions in Walt Disney, Union Pacific, McDonald's and Burger King mentioned above. The Motley Fool owns shares of Walt Disney and McDonald's. Motley Fool newsletter services recommend Walt Disney, The Coca-Cola Company, and McDonald's. 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.