The 7 best stocks to buy and hold forever
They say seven is a magic number. For starters, there are seven days. There are seven deadly sins. And it may surprise some to know that seven is the limit of items or information that a normal person can process and remember on the fly, as discovered by psychologists in the late 1950s. And then who can forget the seven dwarfs (here's to you, Doc).
But seven stocks to buy (and hold) for life? Well, that has to be breaking new ground.
We've gathered fund managers from far and distant planes (Australia) to share the number one stock they would be happy to hold for life. These stocks are the best in the business. The bee's knees, if you will.
There are a few global winners that made the cut, including Siemens, Zscaler and IQVIA. But for those with a penchant for local darlings, there are four stocks that are guaranteed to tickle your fancy too.
Macquarie (ASX: MQG)
Padley dubs Macquarie a “FUFU stock”, which is to say a stock that his team would buy and hold “Forever Unless it F...s Up”.
“We have a FUFU portfolio we run in the Marcus Today newsletter. We just started building it. And the first stock we picked was Macquarie,” he says.
“Macquarie is the first Australian stock I would say I’d be happy to hold for life, although if you know us, we’re never going to pretend that anything is for life in the equity market.”
So, why Macquarie? Padley reveals he actually went for an interview as an institutional equity salesman at Macquarie back in the 1990s.
“They didn’t give me the job. I failed their personality test. Not enough of a team player, they said; too aggressive, they said. Thank goodness, it’s the employees Macquarie rejects that makes Macquarie the best. They rejected me. Good call!” Padley says.
He notes that Macquarie employs more than 16,000 of the best financial brains in Australia and with one goal in mind at that - make money. "Who wouldn’t invest in that?” Padley says.
In addition, Macquarie operates within a fairly unique banking system. Only four to six high street banks dominate the country without competition from overseas players.
“The high-street banks have been left alone by the international banks to operate a quasi cartel that politely carves up the Australian essential banking pie, and so profitable is it that they really haven’t had to work for their money, innovate or be clever. Just exploit,” Padley explains.
"So any smart Australian wanting to work in the financial sector has only one option. Work for Macquarie. With obvious results relative to performance to the other banks.”
This lack of competition on both the domestic and international front allows Macquarie to "command a seat” at nearly every Aussie corporate deal - whether it be mergers and acquisitions, capital raisings or IPOs.
“In the US, the competition amongst the investment banks is savage. You have a choice. But not in Australia,” Padley says.
“Outside investment banking they are finding out, only now, that there is an incredible opportunity in traditional banking. Their recent foray into the domestic mortgage market, the citadel of the big high-street banks, has grabbed market share and hurt their unimaginative competitors.
"I have a Macquarie mortgage. They are so much better to deal with. They have something quite unique in my personal banking experience. Something called customer service. There is nothing they cannot do. Only UBS comes close to challenging them. And they aren’t Australian.”
Like all stocks (and investments), Macquarie isn’t a risk-free ride. Padley explains that like other FUFU stocks, you could hold Macquarie forever, but he won’t.
“We will be holding them for the good times, not all the time,” he says.
“Macquarie is a high beta stock and the risks are obvious. When the financial markets are booming they boom, when the financial markets are correcting they correct.”
Padley isn’t the only fundie who has a penchant for the golden child of Australian investment banking. Elston's Bruce Williams has also named Macquarie as his forever pick.
“We find it amazing that over the past 50 odd years, it has grown from a small merchant bank to a large international investment bank whilst retaining high-quality people, growing profitability, maintaining a strong balance sheet and still to this day is able to adapt and grow into new markets ahead of its peers,” he says.
Despite being a market-facing business - meaning it will suffer from volatility of both revenue and profitability, Macquarie has been able to balance this risk by the growth and scale of their annuity-style businesses, Williams says.
“This diversification allows them to continue to operate well in almost all financial conditions. Proof being that they have been profitable in each and every year,” he says.
Paramount to Macquarie’s success has been a raft of stellar leaders. Think Allan Moss, Nicholas Moore and now Shemara Wikramanayake. But it is also making strides in developing new market opportunities to maintain its competitive edge, Williams says.
“A couple of examples include a focus on leading digitisation in Australian banking, infrastructure development and investment, and most recently a focus investing for a sustainable future through social and renewable energy infrastructure development,” he says.
“Key to this is Macquarie’s ‘loose tight’ methodology which empowers its team to seek out opportunities, build expertise, be held to account on results, and reward them all within a strict risk governance framework.”
Looking forward, Williams is adamant that Macquarie will be able to sustain its impressive growth track record.
“Along with a long growth runway for Macquarie in the areas listed earlier, their business model gives them the flexibility to position the business in new markets as opportunities arise,” he says.
“Given their sound and proven decision making and risk management framework we are confident that they have the capabilities to execute on this for the foreseeable future.”
CSL (ASX: CSL)
Ben Clark, TMS Capital
While Clark notes that a lifetime investment isn’t the typical timeframe an investor would take - even for those who tell you to always think long-term, he says that the ability to withstand disruption was key to his selection.
“The main thing I would be focusing on is what could go wrong for a company and at the top of my list of concerns would be disruption,” he says.
“So many ASX companies, particularly in what is traditionally regarded as the safe or blue-chip area of the market, will have difficult decisions to make over the next decade to ensure the long-term viability of their businesses.”
Clark has named CSL as his pick, whose core blood collection business only has two competitors globally.
"Due to the unique industry structure and scale required, I find it hard to see there being a fourth in my lifetime,” he says.
“Never say never but it’s hard to see how it could be disrupted by advancements in technology, blood plasma and its various components are the building blocks of life and the key components of many treatments.”
In Clark’s mind, CSL is the clear market leader in their field. Thanks to the company’s mentality of “aggressively reinvesting to continue to build scale and efficiency”, Clark believes that’s likely to continue for the years to come.
“CSL for many years has been investing aggressively into R&D and has a formidable pipeline of products at various stages of development pushing through it,” he says.
“Some won’t make it to market, but a future blockbuster drug could definitely be in there and new revenue streams will undoubtedly flow.”
When considering the lengthy time frame that I put to our fundies, Clark adds that company culture is also important to a business's success over the long term.
“I think you’ve got to look at company culture. Businesses that can adapt, spot opportunities and morph to continue growing are who you want to back and CSL is a business that has always struck me as having best in class culture,” he says.
Cochlear (ASX: COH)
Jun Bei Liu, Tribecca Investment Partners
Liu has selected Aussie market darling Cochlear as her “forever” pick. For those who don't know, the company manufactures implants to rectify profound hearing loss.
“There are literally millions of people just in the developed countries who could benefit from an implant and this number is growing each year as populations age,” Liu says.
“Yet with less than 60,000 patients implanted per year, the market is significantly under-penetrated, supporting strong growth for Cochlear for at least the next decade.”
Currently, Cochlear has a market share of over 60%, Liu says. This is in large part due to its implants being superior to its competitors both in terms of features and reliability.
“While technological change is a risk, we are not aware of any superior treatments under development outside of some very early work which is far from human trials,” she says.
“Furthermore, Cochlear is the most advanced with a fully implantable device which is likely to be the next major development in the space.”
As an added bonus, Liu says Cochlear’s management team are world-class and have demonstrated a clear focus on its patients and growing the business over the long term.
However, a key risk facing this stock in the near term is valuation, she says.
“As a high-quality business with defensive structural growth characteristics, the stock is trading at a meaningful premium to the rest of ASX companies. Taking a longer-term view, however, Cochlear is absolutely a bottom drawer stock that will deliver growth year in and year out,” Liu says.
James Hardie (ASX: JHX)
Kelli Meagher, Sage Capital
For Meagher, there are four characteristics of winning long-term stocks that investors should consider. They should:
- Operate in a growing industry
- Demonstrate long-term sustainable competitive advantages
- Boast growth opportunities (eg, scale globally)
- Not be easily disrupted by competitors or wiped out by regulatory change.
In addition, the business should generate strong cashflows so it can self-fund innovation and growth, and also possess a strong board and management team with a focus on creating value for shareholders and sound ESG practices, Meagher says.
With this in mind, she points to James Hardie as her pick of the bunch.
“James Hardie produces fibre cement building products, primarily exterior siding for homes in the US,” Meagher explains.
"It is the dominant player in its market, its main competition being substitute products such as wood and vinyl which don’t last as long or look as good and take longer to install. There is IP that goes into the manufacturing process which makes JHX products difficult to replicate and allows them to have pricing power."
In addition, James Hardie's products are quicker to install for builders, more profitable to sell for distributors (thanks to their higher price point), and for the homeowner, it is an aesthetically superior product that lasts longer and is more environmentally friendly, she adds.
Meagher also believes that James Hardie has a visible long-term global growth trajectory.
"In the US, growth will be driven by continued market share gains from wood and vinyl, new product launches stemming from its investment in research and development that expand its addressable market and the tailwind of more than half of US homes now being over 40 years old and requiring exterior replacement," she says.
"Outside the US, Asia Pacific continues to grow and Europe is a huge opportunity as the business there is still small."
And while the company will be exposed to any volatility within the housing market, Meagher is adamant that it should provide investors with solid capital growth over the long term
Siemens AG (ETR: SIE)
Jacob Mitchell, Antipodes Partners
While many view Siemens as a complex, legacy industrial conglomerate, Mitchell believes it is a new world business with high-quality assets and secular growth opportunities.
"Siemens is a leading player in supply chain and manufacturing solutions, infrastructure, fortifying the grid, and reducing emissions," he says.
"These are long-term investment cycles that will accelerate over the coming decades, and the market is materially underestimating the long-term value."
These include decarbonisation, a mandated area of long-term growth for decades to come, he says. "Siemens is very much the picks-and-shovel play," Mitchell says.
"In a low carbon world, manufacturing lines will need to be re-designed and re-tooled and Siemens is the only company globally that can provide a complete end to end solution that fully integrates both the hardware to make a plant run as efficiently as possible and the software to control and optimise processes."
Siemens designs robots and drives to increase energy efficiency, while its technology enables companies to make a "digital twin" of its products, he says.
"Rather than having to produce endless prototypes in the real world, products can be designed, built and stress-tested in the virtual world, which is incredibly efficient," Mitchell explains.
The auto industry is a great example of this, he says.
"Enormous investment is required to switch production lines from making internal combustion engine vehicles to electric vehicles," Mitchell says. "As Siemens’ software and hardware become embedded within manufacturing lines, it increases the lock the company has over its customers, making it difficult to disrupt."
It also has Smart Infrastructure division which sells energy-efficient building, factory and grid control systems to manage power consumption. And it's a top-three player in rail globally (it provides signalling equipment critical to rail infrastructure), he adds.
Mitchell sees a key risk for Siemens being the capex cycle, as well as competition from new entrants.
Zscaler (NASDAQ: ZS)
Francyne Mu, Franklin Templeton
Mu points to US$48 billion market cap cloud security company Zscaler as her buy and hold forever pick.
"The company has helped to disrupt and drive change from legacy on-premises network security to a cloud and mobile standard," she says.
"The addressable market is large at US$72 billion, with strong secular tailwinds fuelling growth over the long-term. The company’s Zero Trust Exchange proxy architecture is a strong competitive advantage and difficult to replicate at scale, which is a key differentiator from its competitors."
She notes that the company has seen strong revenue growth (+40-50% CAGR) over the last couple of years, driven by its 5,600 clients.
"It is an industry leader, with scale advantages, with 150 data centres globally, preventing 7 billion security incidents and policy violations per day," Mu says.
There is also further blue sky potential for the company as the Internet of Things and Operational Technology develop over time, she adds.
"While we expect some moderation in growth in a post-COVID world, we continue to believe that the long-term drivers underpinning the shift into the cloud and the corresponding security needs are supportive of strong growth and margin expansion over the long term," Mu says.
IQVIA (NYSE: IQV)
David Steinthal, L1 Capital International
Steinthal names IQVIA as his forever pick. The company provides advanced analytics, technology solutions and research services to the life sciences industry.
"The life science industry is on an endless and increasingly complex quest for innovative, precise medical treatments to improve healthcare," he says.
"IQVIA’s unique technology, data analytics and domain expertise make it my pick to help achieve these medical outcomes while delivering healthy, long-term investment returns.”
In fact, IQVIA was behind many of the recent breakthroughs in the treatment of COVID-19, Steinthal explains.
"They are the largest contract research organisation (CRO) globally, responsible for planning and managing clinical trials as well as reporting on safety and efficacy in the real world following regulatory approval of a drug or treatment," he adds.
As such, there aren't that many companies that can compete with IQVIA, or disrupt it, for that matter, he says.
"It has one of the largest and most comprehensive collections of healthcare information in the world, including a database of over 1 billion patient records," Steinthal says.
"Its global healthcare IT network processes 100 billion healthcare records annually while ensuring privacy and security.
"The risk of disruption is minimal when combined with proprietary technology, data analytics and logistical capabilities, managed by 77,000 employees in over 100 countries."
Steinthal says IQVIA's total addressable market is over $160 billion, ensuring its runway for growth will extend well beyond one investment lifetime.
"The recent step-up in profits, cash flow and share price is just the start," he adds.
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Ally Selby is a content editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your...