The One Stock to Buy for the Next Ten Years

By Travis Johnson, Stock Gumshoe, December 9, 2008

The Motley Fool is sending out an ad that claims to have chosen “The Only Stock to Own 2009-2019.”

Now there’s a promise, no? The assumption of almost all pundits and pontificators, myself included, is that this awful market might represent a remarkable buying opportunity — at least, an opportunity for those who make the right decisions, and have a long time to wait for that “rightness” to emerge from the ashes of this recession.

But what to buy? What company represents the “right” decision right now?

Dave and Tom Gardner at the Motley Fool have the answer for you — the “one stock to buy for the next ten years,” which of course doesn’t sound much different than other predictions that have been seen in this space over the last few years, almost all of which would have been awful if you marked them to today’s market price.

They’d like you to sign up for a subscription to their Stock Advisor newsletter, and in return they’ll tell you about the best stock to buy right now, the stock that will perform better than the others from 2009 to 2019.

Or actually, they’ll tell you about the best two stocks to buy right now, since each issue of the newsletter is essentially a competition between the two brothers to see which of them can make the best recommendation. Stock Advisor, by the way, is the flagship newsletter of the Motley Fool, and by far their best long-term performer, though it doesn’t take remarkable returns to be a top performer these days (according to them, it’s the only one of their newsletters that currently has a positive lifetime return, probably in large part because it is their oldest newsletter — Hulbert hasn’t covered them for as long, but his numbers generally agree that they’ve slightly beaten the market and have a long term positive return).

So whether or not you think their advice is worth buying, what are they talking about when they tease us that they have “Your First Stock of the Next Bull Market?”

Here’s the promise:

“… stocks that are right now coiled like a spring, that will shoot upward in the not-too-distant future… dropping a long and substantial string of profits into your account. And they’re detailed straight ahead!”

Now, you can go ahead and subscribe to the Stock Advisor if you want their full writeup … but if you just want to know about these two companies, well, you know the drill: Read on, and the Gumshoe will provide.

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We start with Tom Gardner — the brother who has more of a value focus. Dave Gardner has been running the Rule Breakers newsletter that looks for breakout growth stocks, and before that was a big cheerleader for many of the 1990s tech titans (including some incredible returns); Tom Gardner has been in charge of the Hidden Gems newsletter, which looks for “hidden” small cap value companies, and generally looks more for the Warren Buffett-type buys. That’s an exaggeration of their stock-picking history, but it’s generally true that Dave is the growth guy, Tom is the value guy.

And Tom has this for us:

“First, let’s take a look at my top recommendation for 2009 and beyond…

“To tell this story, we need to go back 35 years to 1973. To a period of crisis and opportunity… a period like what we’re experiencing today.

“In 1973, a company called Scientific Atlanta planned to sell portable satellite earth stations to companies in the rapidly growing cable television field. Yet at the time, many of the so-called experts of the day thought satellite transmission of cable television would take place only in the way out distant future.

“As is often the case when a bunch of “experts” prognosticate in unison on a subject… their prediction proved dead wrong! And cable television boomed in the mid- to late 1970s, and Scientific Atlanta grew with it…”

OK, so this stock is somehow a bit comparable to Scientific Atlanta 35 years ago (they’re owned by Cisco now, just FYI), in that it apparently is undervalued and hidden, and under-appreciated because it wasn’t obvious to everyone that their business would be a success.

“The company’s profits ballooned by 40% a year from 1972 on, as Scientific Atlanta came to dominate a mundane niche inside a larger communications revolution!

“As a result, Scientific Atlanta’s stock soared. And keep in mind, this happened during the brutal economy of the 1970s!”

So that sounds pretty good, right? Unfortunately, we’re bereft of a time machine at the moment, and even if we were willing to relive 1973, we can’t go back and buy Scientific Atlanta and make our millions.

So what is the stock Tom’s teasing today?

“Right now, I’m recommending you stuff your portfolio with shares of a 2009 opportunity I see as having similar characteristics and potential as Scientific Atlanta had in 1973! We’re talking a company with:

“Unique and proprietary products that give it strong pricing power and outstanding margins (just as Scientific Atlanta had )

“The high end of a tech infrastructure-type market that’s a brutal place for new competitors (like Scientific Atlanta had )

“Expert management (you guessed it… same as Scientific Atlanta had back in the day )

“In fact, the company I’m recommending has a CEO with more than two decades of experience and a chairman and co-founder who’s been in the industry for 40 years!”

OK, so that sounds lovely — but of course there are precious few actual clues in there … let’s dig in for a few specifics:

It builds analog integrated circuits that “deal with features such as pressure, temperature, and voltage that are difficult to break down into digital components. Put simply: They do what digital can’t.”

They target the high end of the analog market.

They have consistentlyr eported net margins “near 40%” whcih Tom says is “astounding for a circuit manufacturer”

Their CEO recently explained that “a new company is not going to get a lot of funding to address the ‘relatively small amounts of customers and relatively low unit sales’ involved in this space.”

Some numbers:

More than 15,000 customers, none of which accounts for more than 10% of sales.
US is 32% of sales, Europe 18%, Japan 12%, rest of Asia 37%. Tom says that “this strong diversification helps the company ride out economic downturns in any one industry or geographic area.”

(He doesn’t mention that those 37% of sales to “rest of Asia” may largely be to assemblers who are building stuff that’s sold to Europe, Japan, and the U.S., but that’s neither here nor there.)

What does Tom see for this one ahead?

“20% annualized returns for shareholders over the next five years.”

Now, that may not sound like an awesome return compared to the incredible “500% gain in a year” promises that we often see in this space. And one might hope for a bit more, especially coming out of the trough that we’re living in right now, but it is admirably both reasonable and exciting — after a year of 80% losses for many shareholders, 20% a year on the positive end sounds pretty good, even if it will take all five of those years at that rate of return, plus four more, to make back that 80% loss (this awful year in the market isn’t Tom’s responsibility, of course, just making the point that 20% returns may sound both unattainable and conservative at the same time to shell-shocked investors). Stock Advisor is down about 40% over the past year, which is better than the S&P 500 and about the same as the Wilshire 5000.

Tom calls this “The One Niche Tech Stock for 2009 and Beyond.”

So what is it?

Linear Technology Corp (LLTC)

The shares are flying this morning, probably in at least some measure because of the big ad campaign behind this teaser — they must be getting a fair number of folks excited by this stock, who are then signing up for the newsletter (or gumshoeing it on their own — don’t do this at home!) and throwing down their cash for a few shares. Then again, does a stock really need a reason to move by 7% anymore?

This is indeed a big ($5 billion or so) analog circuit maker, competing with companies like Analog Devices and National Semiconductor. And at this point, at least, they seem to be doing quite well — their margins are significantly better than those of Analog Devices, which to an inexpert eye like mine (I know this business almost not at all) looks like the closest comparable company. That could certainly be because Linear is a bit higher up the food chain, selling into higher end products with more differentiated chips, but I don’t really know for sure — LLTC has operating margins that are twice that of Analog Devices or National Semiconductor, so there is clearly a difference to their business … at least so far. They also have better sales growth and a significantly higher PE, though of course a year ago no one would have been able to say “high” about a Price/Earnings ratio of about 11, which is where LLTC stands now, with very similar valuation metrics to the much larger Intel (though with higher margins).

Is this going to be a company that can survive a big recession? Clearly if sales of electronic gear go down, so will LLTC’s sales — that’s why the shares of all chipmakers are inexpensive right now. LLTC has minimal debt (though unlike some in the business, they do not have a net cash position — they do have a slight amount of net debt), and they pay a decent and growing dividend (over 4% — it’s still hard to believe that chip companies pay real dividends now, even Intel has a similar yield above 4%, too).

I can’t give you an expert opinion on where their products stand, or what their competitive position is, but I can tell you that Tom Gardner’s anointing this as the top stock for the next ten years … and there is nothing in the valuation or in their numbers that would necessarily make you run screaming from the room. They’ve had their share of downgrades and estimate cuts from analysts this quarter, and are currently, as with most stocks that are enjoying a bit of a December rally, up a bit from the lows of last month. They report their second quarter on January 13, and analysts think they’ll earn about $1.50 a share this year (which ends in June for them), and they’re factoring in almost no growth for the year following.

If you’ve got something to share about Linear Technology, feel free to spread the knowledge with a comment below — I’m intrigued, but don’t know enough about them yet to really think about buying.

And I said there would be two goodies for you today:

Tom’s brother, David, also has his pick for the next ten years — and this one we’ve seen before. He’s been selling this idea as an investment in “The New Silk Road” for a few months now, and I wrote a piece decoding that original ad back in October — you can read that New Silk Road article here, or if you just want the short answer …

This second one is Canadian National Railway (CNI)

I don’t have any other exciting news to share about CNI, though the shares are down about 10% or so since I last shared some thoughts. Certainly, railroad investing has enjoyed a real renaissance in the last several years, thanks in large part to high oil prices, commodities, and the increase in the container trade. Before that, and before Warren Buffett’s big railroad purchases in recent years, the shares spent many decades being solid performers that most investors had never heard of … will they go back there?

That’s hard to answer, but I think we should at least call some attention to one thing: Of the two Gardner brothers it’s the growth-crazy, AOL and Nvidia-loving Dave Gardner who chooses a railroad, and the cautious, tepid value-seeker Tom Gardner who selects a semiconductor company.

In a topsy turvy world like this, I guess that kind of switcheroo should be expected … but it still makes one take pause. What do you think?


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longtime
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longtime

Well, I think that stock market is overvalued, so i sold this one too…

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Steve O
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Steve O

We are in a correction of unwinding massive leverage where none has not taken place, once someone faces up to it and defaults we should get a domino effect and you can safely bet that GS will be short. These Fool picks are usually good shorts in normal times.

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