With 2020 drawing to a close, many long-term investors are starting to ask themselves, “what’s next?” That’s because today feels much like the year 2000 — a decade that began with great hopes for tech companies like AOL, Yahoo and Xerox, but ended with a reckoning. In fact, the tech-heavy Nasdaq index ended the decade 43% lower than it started. (It would take until 2014 to fully recover). Even the S&P 500 found itself losing 24%. And that makes the outlook for long-term stocks interesting.
With stocks once again pushing multi-year valuations, it’s tempting to throw in the towel. In December, JP Morgan cut its U.S. equity return assumptions to just 4.1% — its lowest in recent memory.
Nonetheless, there’s still hope. The 2000s also saw many companies succeed. From Apple (NASDAQ:AAPL) to Target (NYSE:TGT), many investors still managed super-normal returns. All you need are strong, growing businesses at reasonable valuations. And right now, that principle rings more true than ever.
It’s tempting to overcomplicate good investing. But with these “set-it-and-forget-it” long-term stocks, investors will see a wide variety of potential winners for the next decade. They are:
- Airbnb (NASDAQ:ABNB)
- Airbus (OTCMKTS:EADSF)
- DraftKings (NASDAQ:DKNG)
- PayPal (NASDAQ:PYPL)
- Nestle (OTCMKTS:NSRGY)
- SolarEdge (NASDAQ:SEDG)
- Cameco (NYSE:CCJ)
- Alibaba (NYSE:BABA)
- First Republic Bank (NYSE:FRC)
Now, let’s dive in and take a closer look at each one.
Long-Term Stocks for the Next Decade: Airbnb (ABNB)
Airbnb has all the characteristics of a “set-it-and-forget-it” holding. The company holds a near-monopoly in the home-sharing business. With its scale, Airbnb now has some of the lowest host fees in the industry. That’s driven more hosts to the site, raising the number of customers, and so on. In turn, the virtuous cycle has allowed Airbnb to grow three times larger than its closest competitor, Vrbo, owned by travel giant Expedia (NASDAQ:EXPE).
Over the next decade, Airbnb will keep growing as more people see home-sharing as a viable hotel alternative. Many businesses are even starting to use Airbnb for corporate travel.
Airbnb’s valuation also still seems reasonable despite its post-IPO run-up. The company is only worth slightly more than Booking Holdings (NASDAQ:BKNG), Priceline and Kayak’s owner. That’s even though Airbnb’s “take rate” is far higher than the typical OTA (online travel agent). By 2030, Airbnb expects over 400 million guests in emerging markets alone.
In 2019, Airbus made a surprising announcement. After years of lagging behind Boeing (NYSE:BA), the company finally delivered more aircrafts than its American counterpart.
Boeing’s bad luck was a contributing factor; the U.S. aircraft maker had flubbed its response to the 737 Max crisis after two crashes killed 346 people. But Airbus’ strategy also played a part. For years, the European company had focused on developing bigger planes. The plans culminated in 2005 with its launch of the A380, a double-decker aircraft that could carry up to 800 passengers. While technologically impressive, however, the A380 was a commercial flop. The company delivered only 234 units while losing ground to Boeing’s nimbler fleet.
Since then, Airbus has embarked on a massive self-help campaign. Under CEO Tom Enders, the company relaunched the A320, a smaller narrow-body aircraft. (Its popularity would later force Boeing to launch the 737 Max). And revenues have since recovered — before the novel coronavirus pandemic, sales rose at 8%.
As air travel returns to normal, Airbus will gain. At 1.7 times enterprise value-to-revenue, the company trades at a significant topline discount to Boeing’s 2.6 times multiple, making it a robust holding for the long-term.
Long-Term Stocks for the Next Decade: DraftKings (DKNG)
In 2013, Nevada became the first U.S. state to allow online poker. Delaware quickly followed the same year. Since 2018, another 12 states have legalized online gaming. And as more states begin to loosen gambling laws, DraftKings will be there to profit.
The Boston-based company was one of the first movers in sports betting. The firm initially started with fantasy football and has since expanded into fantasy baseball, basketball and more. Currently, its crown jewel — legal online sports betting — sits in a market that analysts expect to grow almost 15% per year through 2025.
Americans have always been able to bet through foreign-hosted websites, but choices are limited. According to the U.K. gambling commission, football (i.e., soccer) makes up almost half of all U.K. online betting. Horses and tennis make up a large remainder. DraftKings, on the other hand, offers sports betting tailored to American consumers. U.S. professional sports and iGaming take the front-and-center stage.
Overall, Wall Street currently values DraftKings at $21 billion, a fraction of the potential $100 billion-per-year market that could come as more states legalize gaming. And that makes DraftKings an ideal “set-it-and-forget-it” stock for the long term.
As e-commerce companies have fought Amazon for market share, one firm has emerged as a winner: PayPal. The low-key payments firm now surprisingly holds 55% of the online payments market. And in the world of payment processing, scale matters.
Early on, PayPal decided to avoid the established world of in-person retail sales. The decision proved prescient. While companies like Square (NYSE:SQ) have struggled to break into the slow-growing POS (point-of-sale) market, PayPal instead focused on e-commerce. Since 2016, revenues have doubled while net income has increased 120%.
PayPal’s success will continue throughout the next decade. Its scale now means few players can compete on fees. And its massive existing base of 305 million accounts gives it the ability to cross-sell new products, such as cryptocurrency.
Shares won’t come cheap; the company trades for 51 times EV-to-EBITDA, compared to Visa’s 31 times multiple. But hold on long enough, and the company’s growth will eventually justify its premium value.
Long-Term Stocks for the Next Decade: Nestle (NSRGY)
Investors looking for a solid “set-it-and-forget-it” stock should consider Nestle, a 154-year-old multinational packaged food maker. Under CEO Mark Schneider, the blue-chip company has spent the past three years evolving into a leaner, faster-growing organization. The changes couldn’t have come at a better time. Three years ago, American activists targeted Nestle, demanding the same ruthless cost-cutting and aggressive financial engineering Kraft Heinz (NASDAQ:KHC) had gone through.
By ignoring calls to downsize, Nestle has emerged even more robust. It’s since far surpassed European rival Danone on its home turf while positioning itself for growth in emerging markets. The company has also weathered the coronavirus pandemic with expert precision. Return on equity has risen from 23% to 28% in 2020 as sales of pet food, plant-based foods, and coffees have grown.
The company’s 17.5 times EV-to-EBITDA valuation also looks reasonable, given the company’s strength in emerging markets. And though Nestle shares won’t surprise you with 1,000% returns, they will still bring stable growth to a long-term portfolio.
On the other end of the spectrum, investors looking for fast growth should consider SolarEdge, a maker of high-tech components for solar arrays.
The company works in the specialized business of power optimizers, inverters, and monitoring systems for solar systems. This keeps margins high; its 12% net margins are double those of photovoltaic (PV) panel maker First Solar (NASDAQ:FSLR), which competes against cheap Chinese imports.
Revenues at solar companies will continue to grow as Western economies and China moves towards net-zero carbon emissions by 2050-2060. And as a maker of critical solar components, SolarEdge will outperform its more commoditized peers.
There is, however, one wrinkle to SolarEdge: investors will pay a premium for the company’s high-quality growth. The company trades at a princely 10x EV-to-revenue, putting it even higher than Apple. But with revenue growth topping 20% per year, the company seems well-positioned to take advantage of a world moving away from fossil fuels.
Long-Term Stocks for the Next Decade: Cameco (CCJ)
On the other end of power generation sits Cameco, the largest miner of power plant uranium.
Usually, I wouldn’t recommend a company in the dying world of mining, metals or energy. Dying industries are usually bad long-term bets — few buggy-and-whip makers still exist today. But when it comes to diversification, you should always consider the best company in every sector. And with its monopolistic power in uranium mining, Cameco looks like a good diamond-in-the-rough.
The company owns two of the most productive uranium mines on the planet. Its Athabasca Basin mine in Canada holds uranium reserves 100 times more concentrated than world averages. And it’s Kazakhstan mine isn’t far behind. That’s helped the company’s shares hold up, even as traditional energy companies have stumbled. Since 2016, shares have risen 9.6%, versus Exxon Mobil’s 44% fall.
As the supply of dismantled nuclear weapons runs out, nuclear power plants will turn to Cameco to make up the difference. Long-term investors should take note — Cameco is the one company traditional energy company that could thrive in the next decade alongside solar and other renewables.
As China’s middle class continues to grow, Alibaba looks set to succeed. Not only does the e-commerce company maintain a dominant position in Chinese online shopping and logistics. Like Amazon, Alibaba also has a growing data center business – a critical piece of internet infrastructure.
The company will have to overcome several challenges over the next decade, from appeasing the Chinese Communist Party to managing its foreign expansion. Steering a behemoth is never easy.
But Alibaba does have some hidden weapons. Firstly, there’s Alipay, an e-payments system owned 33% by Alibaba. The app has quickly spread through Southeast Asia and could open the door for its parent’s e-commerce business. Secondly, there’s last-mile delivery. Without a Chinese version of FedEx (NYSE:FDX) or UPS (NYSE:UPS), Alibaba has forged ahead in assembling a massive network of local distributors. Finally, there’s implicit government approval. Private businesses have always walked a fine line in appeasing both shareholders and the Chinese Communist Party (CCP). By quietly sidelining founder Jack Ma, Alibaba looks prepared to do what it takes to stay in the government’s good graces.
While many Americans might balk at kowtowing to the CCP, investors stand to profit. Shares have already almost tripled since its 2014 IPO. The next decade looks set to bring more significant gains.
Long-Term Stocks for the Next Decade: First Republic Bank (FRC)
Finally, there are financials.
It’s been a disappointing decade for financial stocks. Former high-flyers like Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) were laid low by the 2008 financial crisis. Many, like Bear Stearns, never made it out the other side. Yet, history has shown the importance of diversification. And First Republic Bank looks like one of the strongest banking players for the next decade.
Founded in 1986 by veteran banker Jim Herbert, First Republic has quietly stuck to its knitting while other banks have lost their heads. The conservative firm focuses on banking for wealthy clients, typically finding new high-quality clients by offering jumbo mortgage loans. Not only are well-to-do clients less likely to default on loans, the bank reasoned. They’re also more likely to stick around longer and buy higher-value banking products.
The formula has worked. Since 1988, First Republic has averaged an 11.4% return on equity while never posting a single year of losses as a public company. Since 2010, shares have risen almost 400%.
Telling friends that you own First Republic stock might not turn many heads at a cocktail party. But when your goal is to buy long-term stocks for the next decade, it doesn’t matter what your friends at the party think. Instead, it’s this:
- How much your investments can grow.
- How well you can sleep at night.
- And how you can party like it’s 1999 without a decade-long hangover.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.