These Stocks Are as American as Apple Pie…
(and a cup of coffee and a candy bar charged on your credit card)
We’ve all seen the late-night informercials for the magic cooking pot that does all the work for you… the overly enthusiastic Ron Popeil shouting into the camera: “Just set it and forget it!”
What if investing in the stock market could be that easy?
It can be, if you buy and hold the right kinds of stocks… invest in companies that can weather a bear market, grow their businesses well into the future, and ultimately produce steady gains over your lifetime.
I’ve gathered three of my favorite “forever” stocks:
Forever Stock No. 1
(NYSE: AXP)
American Express
Let’s go back to August 1914, when American Express earned a tremendous amount of economic goodwill…
As Europe hurtled into World War I, some 150,000 American tourists were stranded and unable to get cash to go home. But word began to spread that American Express was still cashing checks and even honoring “letters of credit” from U.S. banks.
The company wasn’t a bank… But it had cash and a presence in every major city in Europe.
Ultimately, nearly all the 150,000 tourists ended up getting home safely. And many of them remained grateful to American Express for the role it played in their escape.
Today, we know American Express as a $100 billion credit-card colossus. About 115 million American Express cards are in use around the world, with cardholders racking up more than $1 trillion in charges every single year. “AmEx” also collects nearly $3 billion per year in “annual dues” from its customers simply for the right to carry the card.
But its reputation for safety and reliability remains American Express’ most valuable asset.
In fact, the “American Express” name is one of the most valuable parts of the company. This won’t go away as a bear market approaches.
Market-research firm Interbrand estimates that the American Express brand name was the 24th-ranked brand in the world in 2018, worth $19 billion – or about 20% of its current market capitalization.
Brand value encapsulates a variety of fuzzy, hard-to-value qualities – a company’s reputation, competitive moat, loyal customer base, and so on. These are the characteristics that Warren Buffett lumps together under the umbrella of economic goodwill.
Don’t confuse that with the “goodwill” you might find on a company’s balance sheet, though. Accountants derive “accounting goodwill” based on how much a company pays for the businesses it acquires.
It’s economic goodwill that will keep American Express growing through good times and bad. We trust the company, and we’ll keep using its cards to fund our purchases year after year. Note that even in the Great Recession of 2008, American Express still grew its card spending volume by 5% that year. Expect to see more robust growth in the future, as electronic payments continue to gain share over cash and check transactions over time.
And even before that future growth, American Express is already a great company with impressive financials. Analysts expect it to generate $43.5 billion in revenue this year. That’s $4 billion MORE than Visa and MasterCard combined. Its operating margins are attractive at more than 20%. And it generates nearly $8 billion of free cash flow (“FCF”) each year.
These are all things we like to see in a company that is built to weather a market storm.
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Forever Stock No. 2
(NYSE: HSY)
Hershey
We like chocolate and candy in good times and bad.
We continue to like Hershey today as well. It’s a world-class business that isn’t much affected by the “slowing global growth” story that’s popular today. Its stock trades at a reasonable price. And it has been incredibly strong in the face of recent market volatility.
Hershey is a roughly $25 billion giant in the sweets market. The company makes the iconic chocolate “Kisses.” And it sells sweets under about 80 other brand names, including Reese’s, Twizzlers, Milk Duds, Jolly Rancher, and Whoppers. It also makes savory snacks like Skinny Pop popcorn and Krave beef jerky.
In 2018, 84% of Hershey’s business was in the U.S., so slowdowns in other countries won’t play much of a role in its results. And because Hershey sells food products that folks buy in good times and bad – chocolate sales may even go up in bad times – it’s relatively resistant to an economic downturn in the U.S.
Over the past 10 years, Hershey has grown its sales every year but one – 2015, in which it saw a 0.5% decline. In those 10 years, it has grown its earnings per share from $1.88 to $5.39 – a 187% increase. And they were up every year.
Over the past 12 months, Hershey generated record sales of $7.8 billion. It grew its gross profits to $3.5 billion. And its net profit margins are at an all-time high of 15%.
Hershey also pays a more than 2% dividend that has grown over the last five years at an average of 8.5%. And the company is trading at a reasonable price.
In 2018, Hershey’s sales have grown to $7.8 billion, but capital investments remain incredibly small – just over 4% of sales. And with FCF of more than $1.2 billion, Hershey had plenty of resources to return capital to investors.
In 2018, shareholder dividends totaled $563 million, or 17% of gross profits. Moreover, Hershey is also returning capital through repurchasing its own shares and doing it consistently.
As long-term investors, one of the biggest reasons we like a company like Hershey is that it will be around when we retire. And it will be much bigger than today.
Forever Stock No. 3
(Nasdaq: SBUX)
Starbucks
Starbucks needs little introduction to most Americans. The ubiquitous chain of coffeeshops is one of the great success stories in American business over the past 50 years.
In just the past decade (2008-2018), its share price has soared by more than 1,200%. And the company has solidified its brand. According to Forbes’ ranks, Starbucks’ $16 billion brand the 34th most valuable in the world.
As we’ll show you, Starbucks uses that brand to generate loads of cash and create huge shareholder value. It’s a classic example of what we call a “Global Elite” stock.
Today, Starbucks is a $100 billion company with more than 14,000 locations in the U.S. About 60% of those stores are company-operated. The rest are licensed or franchised.
That’s one key to Starbucks’ success… You can find one of its coffeehouses just about anywhere. And you know what you’re going to get, be it in New York City or Hong Kong.
Starbucks has about the same number of U.S. stores as McDonald’s (MCD). Those two companies lag behind only sandwich chain Subway, which has around 25,000 locations in the U.S.
Few legal products hook their users like Starbucks’ coffee. And revenues at the company have more than doubled from about $10 billion to over $25 billion.
One of our favorite parts of the Starbucks story today dovetails with a documentary we recently released on the floor of the New York Stock Exchange… China and its “New Money.”
With growth slowing in the U.S., you might think Starbucks’ brightest days are behind it. They’re not. Its biggest potential market – China – is still largely untapped…
Starbucks executives are convinced that China can become the company’s largest market in the world. And we agree.
The company’s goal is to operate 6,000 stores in 230 cities across mainland China by the end of fiscal 2022. It plans on adding about 600 net new stores per year in China. That’s a frenetic pace. Think of it this way… Starbucks is opening a store every 15 hours in China.
With its big push in China, Starbucks will soon have more international than domestic stores. Despite slowing same-store sales growth, international expansion has fueled top-line growth.
Given that China only represents about 18% of Starbucks’ $25 billion in total annual revenue, it’s an exciting time in the company’s development. Starbucks’ market cap is around $101 billion. And we believe it has plenty of room to grow due to its China expansion.
China and further international expansion will continue to drive FCF at the company. Over the past four quarters, Starbucks has generated $3.4 billion in FCF – 14% of its revenue.
Moreover, it has committed to returning $25 billion to shareholders through buybacks and dividends through fiscal 2020. That’s about one-fourth of its current market cap. The company returned more than $8 billion in 2018 alone.
Starbucks deals an addictive drug. It has an iconic brand that it will be rapidly spreading across China for more than a decade. And its fantastic financial returns translate into stellar shareholder returns.
Austin Root is editor and portfolio manager of the Stansberry Portfolio Solutions products, a set of four distinct, fully-allocated model portfolios designed to take the guesswork out of investing. Prior to that, he co-founded and ran North Oak Capital, a New York-based hedge fund with a strategic investment from Tiger Management. Austin has also worked as an investor and analyst at world class investment firms including SAC Capital, Soros Fund Management, and The Blackstone Group.
