Paul Tracy of StreetAuthority has been touting a special report he’s selling called “10 Best Stocks to Hold Forever” — he uses the example of the March 2009 market bottom as a great time to buy dominant, dividend-paying multinational companies …
… and says that the recent market weakness again points at the opportunity provided by these big, solid stocks.
Here’s how he puts it:
“Warren Buffett, George Soros, John Kerry… maybe even YOUR own Congressman already own many of these stocks.
“Now regular Americans like you and me can pull back the curtain and buy these ‘forever’ ideas. My advice: Buy them, forget about them, and hold them forever.”
Now, I know that lots of my readers are already yelling at their computer screens — “Buy and hold is dead!” goes the cry, and that has certainly been increasingly the sentiment of the market over the last few years … especially since, in so many stocks, “buy and hold” has meant “buy and watch them go down over time.”
Any inflexible strategy is bound to have problems and down years … heck, even the flexible ones have down years … but still, there’s a certain part of me that loves “buy and hold.” Missing the worst days and the worst crashes in the market is great if your stop losses get you out before the bottom hits, but not missing the best days has historically been more important, if only because those who sell as their stocks go down are generally terrible at buying back in before the stock or market has fully rebounded or recovered (no not you — I mean everyone else).
In a world where I have no confidence in the overall direction of the market, I can at least have some confidence in big businesses with stable earnings, growing revenues, and growing dividends. Maybe we can’t hold them forever, but most of my best picks over the long haul have been stocks that I’ve held through up and down markets (and watched the dividends compound dramatically, in some cases) … and my biggest mistakes have mostly been selling stocks that, after I sold them, beat the market handily. That said, I also have held on to my share of stinkers for far too long, so maybe this is just a psychological flaw for your friendly neighborhood Gumshoe.
So that’s my backdrop — against that, we see profiled the ten best stocks to hold forever, as teased by Paul Tracy. The pitch is to get you to subscribe to StreetAuthority’s Top 10 Stocks — it’s a cheap, intro level newsletter that picks Tracy’s favorite ideas from among all the other StreetAuthority newsletters each month (I don’t know how these kinds of letters do — whether or not the publisher can reliably pick the “best” pick from 6-10 ideas from a host of their shop’s newsletters each month, but they are pretty popular among publishers and many of them offer some version of this, including the Cabot Stock of the Month letter and, on a slightly broader scale, Daily Wealth Premium from Stansberry & Associates, among many others).
And in case you don’t feel like signing up for yet another subscription, how about we figger out which stocks he’s picking? That is, after all, what we do and, I assume, why you’re here.
He gives us a couple “freebies” right off the bat — a dominant company with a 65% market share and a huge cash hoard, which is Google (GOOG), and an infrastructure investor that owns hugely valuable assets including an Australian coal terminal, Chilean electricity transmission, and timber, which is Brookfield Infrastructure Partners (BIP). I’ve owned Google (which, of course, does NOT pay a dividend but certainly has lots of cash) almost since the IPO and still like it, and I like BIP but don’t own it (and was disappointed, frankly, to see the shares haven’t dropped all that much — I would have liked to pick some up at a higher current yield than the 5-6% it’s providing now). So that’s promising — the two freebie picks are ones that I certainly appreciate. How about the other eight?
“‘Forever’ Stock #3 is one of the most dominant companies I’ve ever researched. This company sells its product in 180 countries and owns 7 of the world’s top 15 global brands in its market.
“But it’s also the most shareholder-friendly company I’ve ever seen. In the past three years it’s raised its dividend 39.1%… and by the end of last year, the company had repurchased more than 330 million shares (about 16% of all shares outstanding). That’s one reason why earnings per share jumped 20% in 2010.
“Buy it now and you’ll lock in a solid yield of nearly 4%, and I expect another dividend increase in the next quarter or two. Meanwhile, the company plans $5 billion more in share repurchases this year, which should support the share price in just about any market.”
This one is Philip Morris International (PM), the tobacco company. All investors have their own screens for the types of companies they like, and I personally won’t invest in tobacco companies so I don’t follow this one (or their former parent Altria) very closely, but the cigarette business has been perhaps the best business in the world over the last 100 years — near-monopoly brands, an addictive product, it’s hard to argue with the finances of these companies unless you think the world is going to quit smoking at a far faster rate than it has in the past. This is generally considered to be the fast-growth side of the Marlboro and friends company, since it’s the international business and doesn’t have exposure to the declining US smoker base, but it still has a hefty yield of 3.8% and a forward estimated PE of 12.
“‘Forever’ Stock #5 is a special ‘toll’ company with more than 887 million users around the world… and more than $540 billion in transactions.
“Although the company was founded in 1966, investors couldn’t buy a stake until five years ago.
“Since it’s gone public, the stock is up 610%. Maybe that’s what attracted the world’s greatest investor — Warren Buffett. His giant investment firm, Berkshire Hathaway (NYSE: BRK-B), bought a 216,000 share stake in this “Forever” stock just a few short months ago.
“Now this company is making a big splash in China… and buying back more $2 billion in stock. That makes it a no-brainer for our ‘Forever’ list.”
This one is another company you’ve undoubtedly heard of, Mastercard (MA) — Buffett’s Berkshire Hathaway did add 216,000 shares of the cashless transactions giant early this year, though speculation is that the pick was actually made or recommended by Berkshire’s newest investment guy, Todd Combs, who previously held the stock in his hedge fund. Mastercard has been a great investment since it went public a few years back (before that, it was basically a cooperative owned by the member banks, like Citibank, etc.), and though it’s smaller than competitor Visa (V) the two have close to a global duopoly on electronic payments processing and credit/debit card networks. That has led to some of the problems that occasionally rock the shares, including antitrust concerns and regulatory inquiries about the fees that these companies and the banks charge to retailers for access to the payment network, but regardless of those problems they’ve continued to barrel along so far — MA and V carry essentially the same valuation, they’re both priced at a PEG of about .9 (the forward estimated PE for both is about 14, and they’re expected to grow at a faster annual rate than that, somewhere between 15-20% a year).
If you have any concern about MA or V, it’s probably that antitrust or regulatory concerns will cut into their effective duopoly and make them compete more vigorously against each other — other than that, it’s hard not to like their business model (a tiny cut on billions of transactions) or the tailwind of an increasingly cash-less world. I haven’t ever owned either of these stocks, but I say that with some regret.
“‘Forever’ Stock #6 isn’t just on our radar. Forbes.com called it one of “3 Good Buys in Master-Limited Partnerships (MLPs).”
“This gem of a fund just started trading in 2009, but it’s turning heads. It’s already returned 113%. That’s not much of a surprise. The index it tracks delivered a 10-year annualized return of 17.4%!
“It does so well because it holds dozens of energy partnerships that have to pay out the bulk of their cash flow to investors. Best of all, most of these businesses pay zero corporate tax.”
Yes, Master Limited Partnerships (MLPs) have enjoyed a great past decade or so, handily clobbering the market — most of these publicly traded partnerships are owners of energy infrastructure assets … pipelines, gathering systems, storage tanks, that kind of thing, though the businesses vary somewhat (including propane truck delivery businesses, gas refining or NGL plants, and even some exploration and production companies, along with a few oddballs like cemeteries, asset managers and macadamia orchards).
And while for a long time there wasn’t an easy ETF answer to buying into the MLP sector, there now are a few — the one Tracy is teasing here is actually an ETN, not an ETF, but they’re quite similar, he’s touting the JPMorgan Alerian MLP Index ETN (AMJ). Current yield of about 5%, and, as a bonus, you don’t have quite the same tax headache (or benefit) as do individual owners of MLPs (MLPs are tax sheltered pass-through entities at the corporate level, and are partly designed to be tax-deferred investments for individual unit holders — much of your distribution is return of capital, so you don’t owe much tax until you sell).
ETNs are debt instruments — what you really own is a promise from JP Morgan that they will track the performance of the Alerian MLP index and pay you a commensurate dividend. If you want more of a “straight” ETF, it hasn’t been around quite as long but has almost exactly the same expected dividend and the same exact expense ratio (both charge .85%), that’s the ALPS Alerian MLP ETF (AMLP).
I tend to like MLPs if you want steady yielders, and if you’re interested in the sector it’s nice that there’s now a reasonable ETF option (before AMJ, which was actually a Bear Stearns ETN before JP Morgan took them over, small investors who wanted to diversify in the sector were stuck with closed-end funds that had huge expense ratios, used leverage that beat them up in the 2008-2009 crisis, and sometimes had trouble tracking the index — though they did also sometimes outperform the index, of course). MLPs have historically pretty low yields right now, so the 5% doesn’t sound so great compared to the 8% of a few years ago … but it certainly sounds good next to 1% savings accounts, so everything is relative.
“I like to call ‘Forever’ Stock #9 “Baby Berkshire.” It invests just like Warren Buffett’s Berkshire Hathaway, but there is one major difference…
“This company is still small enough to make nearly any investment it wants, which can lead to big returns. Warren Buffett himself said of his company, ” Berkshire’s capital base is now simply too large to allow us to earn truly outsized returns.”
“Senator John Kerry and his wife own at least $500,000 of this stock… and for good reason. From its low in March 2009, the shares have nearly doubled.
“One more thing to like… Morningstar says, ‘We hold the manager of [this company] in high regard and award them our highest Stewardship Grade.'”
This one is another that’s been in my personal portfolio for many years, Markel (MKL), a specialty insurer (mostly) that avidly tries to associate itself with Berkshire in terms of business and investment strategy — they even typically hold a confab at the Berkshire annual meeting. Markel has had tough times in its core business over the last couple years, with underwriting losses and up and down investment performance, and there is some fear that they’re facing increased competition in their specialty lines business that has really to a large degree defined the company (specialty lines, by my way of understand, just means non-commodity insurance — special insurance for offshore rigs, or hairdressers, or whatever, anything where you can build a niche because it’s hard for a new competitor to build expertise and break in). With Markel it’s historically been a good investment to buy the shares when they trade at a price/book of less than 1.2, and it’s slightly below that after the recent slide (around 1.1 now), but it’s also important to look at the core profitability of the business.
Insurers depend on two things: Underwriting, and investing the float (the premiums that are paid in and that they hold until they have to pay claims back out). They can often do well if they’re really good at just one of them (they can underwrite coverage at a small loss — which would give a combined ratio of over 100 — but make up for it because they can invest the float profitably, for example), but to have exceptional performance they have to do good at both over the long term. Markel most recently had a combined ratio of 103, so they were losing money — in a low rate environment that’s kind of tough, because it means that you’re basically borrowing the float at a 3% interest rate, which isn’t so low these days.
I still hold the stock and also admire management and think they’ve invested well over the years under investment manager Tom Gayner, but I wouldn’t expect rapid growth — in fact, with Berkshire also trading at a historically low price/book ratio (though that number is in many ways flawed as a measurement), there’s also ample reason to argue in favor of papa Berkshire (BRK-B or BRK-A) over baby Markel. I own both, more Berkshire than Markel, and don’t expect that to change anytime soon.
So there you go — half of the “secret” eight stocks to “hold forever” per Paul Tracy, and we’ll get to the other half in a future installment … we didn’t expect these to be high-risk crazy ideas, and they aren’t, so it’s hard to argue very strongly against most of these stocks (though easy, of course, to argue that “hold forever” might be exaggerating a bit). Still, if you’ve got plaudits or criticisms of any of those four revealed above (or Google or BIP, for that matter), feel free to shout it out with a comment below.