10 Stocks To Last The Decade A few major trends will likely shape the next ten years. Here's a buy-and-forget portfolio to capitalize on them.
(FORTUNE Magazine) – Admit it, you still have nightmares about the ones that got away. The Microsofts, the Ciscos, the Intels. They're the top holdings in your ultimate "coulda, woulda, shoulda" portfolio. Oh, what might have been, you tell yourself, had you ignored all the naysayers back in 1990 and plopped a modest $5,000 into, say, both Dell and EMC and then closed your eyes for the next ten years. That's $8.4 million you didn't make.
Now, hold on a minute. This is no time for mea culpas. Okay, so you didn't buy the fastest growers of the past decade. Get over it. This is a new era--a new millennium, in fact--and the time for licking old wounds has passed. Indeed, the importance of stocks like Dell and EMC is no longer their potential as investments (which, though still lofty, is unlikely to compare with the previous decade's run). It's in their ability to teach us some valuable lessons about investing from here on out.
First, those big tech winners of the 1990s showed how great stocks emerge from large-scale, dynamic trends that have the power to transform the economy. EMC, for example, became the leading computer-storage company thanks to the Internet and the explosion in home PCs. Second, winning companies not only understand how trends are moving but also can execute plans that skeptics mock as grandiose illusions. In Dell's case, the company's remarkable deployment of build-to-order manufacturing techniques became a de facto upgrade of assembly-line technology. Compaq and IBM learned that lesson the hard way.
Yes, this is a new era and one that's bound to have its own heroes. To find out who those heroes might be, FORTUNE first identified four sweeping trends that we think have the potential to transform the economy. Any one of these four--the lightning-fast changes in communications networking, the brave new world of entertainment, the "boomerization" of financial services, and biotech's coming of age--is explosive by itself. Combined, they appear certain to transform the way we work and interact.
Of course, finding promising investments to capitalize on those trends isn't easy. Just look at the retail sector. If you'd bought Wal-Mart back in 1990, you'd be up 1,100% right now (and offering periodic novenas to Sam Walton). But if you'd put money on Kmart, you'd have lost 42% over that same decade.
So for help in finding the stocks best positioned to capitalize on these four trends, we sought out some of the top stock pickers in the country--Blaine Rollins, manager of the Janus fund, Kurt von Emster, manager of the Franklin Biotechnology Discovery fund, SunAmerica portfolio manager Frank Gannon, and strategist Marshall Acuff at Salomon Smith Barney, among others. We also did our own due diligence by poring through financial statements, talking to companies, and giving their products a test run. The result: ten stocks that we think will be winners over the coming decade. We've included some household names but also a few surprises. They all share exceptional management and an ability to execute no matter what happens in the macro-economy--characteristics we think will be even more important if the economy slows and investors put a premium on those companies that post consistent numbers.
One caveat--momentum traders need not apply. Given the market's recent volatility, a few of our picks could experience drops over the coming months and years. But if you're a long-term investor, these ten should put your retirement account in good stead and protect you from those recurring nightmares about the stocks that got away.
No matter how advanced communications technology gets, it still all comes down to basic, old-fashioned convenience. Anyone who's ever stared in red-faced frustration at that little hourglass icon, or tried to de-jam the fax machine, knows that sometimes so-called tech advances seem more like retreats. As Steve Harmon, tech guru and founder of Zero Gravity Internet Group, puts it, "We have a tendency to believe that technology is very smart. In fact, it's stupid."
That means there's a huge market opportunity for companies that can cut through the clutter and actually make life (and business) easier. Who's positioned best? As we see it, four companies: Nokia (NOK: $54), Nortel Networks (NT: $77), Enron (ENE: $73), and Oracle (ORCL: $74). True, these four have entirely different businesses--wireless handsets, telecom equipment, broadband connections, and software--but all offer what are essentially supermarkets of products, which should help them overwhelm less diversified competitors. If you're looking for precedents here, think Cisco Systems and Microsoft.
At the top of our list sits Nokia, the Finnish maker of wireless phones that controls 27% of the market (compared with 17% for Motorola and 10% for Ericsson, according to Dataquest). Over the past five years Nokia has seen off-the-charts sales growth, increasing its revenue fourfold since 1995, to an estimated $26 billion this year. And net income has climbed from $480 million to a projected $3.8 billion. Even more impressive, the consensus among analysts is that Nokia will continue to grow profits 30% or more over the next five years. In part, that growth will come from new businesses. Though handsets account for two-thirds of current sales, the company is furiously ramping up its wireless infrastructure business. It also recently entered an alliance with Whirlpool to create "smart" appliances (such as a refrigerator that can call in an order for that Haagen-Dazs fudge ripple you just polished off). Anita Farrell, who covers the company for Merrill Lynch, says this strategic shift will begin reaping balance-sheet benefits within the next 24 to 36 months and should reduce the risk of doing business in an industry with such a famously volatile product cycle. "Nokia can deliver value for investors and sustain its top-line growth as well as its exceptional returns," she says.
Another communications play--and one that, like Nokia, comes from outside the U.S.--is Nortel Networks, formerly the staid Northern Telecom. The Canadian-based company is a leading manufacturer of the high-speed optical networking systems that carry Internet traffic. The market-share numbers speak volumes: More than 75% of North American traffic on the Internet--and 50% of Europe's--travels across Nortel equipment.
Like a lot of stocks in this sector, Nortel's isn't cheap. It trades at a P/E of around 114, bolstered by a 52-week gain of 250%. But profits are growing at a clip of 30% a year, and the company's biggest challenge right now is meeting the voracious demand for its wares--not exactly a bad problem to have.
"Nortel is diversified and strong and has a suite of products backed by research and technology that is very deep," says Harmon. "They could become the GE of technology the way they are operating."
If Nokia and Nortel build superior personal devices and telecom equipment, Oracle and Enron are making communications more reliable and efficient. Oracle is one of the great comeback stories of the past few years. Analysts started getting pessimistic on the stock in the late 1990s, out of concern that its core database software market had evaporated. Enter the Internet. Oracle managed to reinvent itself as the leading provider of e-business software, which lets companies track suppliers and customers and is a crucial component of B2B transactions. Maybe that's why Oracle's blue-chip client list reads like a who's who of corporate America, including companies like General Electric, Ford, and Motorola.
What's more, the stock is 20% off its high and regaining momentum. Though it's no deep-value pick, the slide means that opportunistic investors finally have an attractive entry point. Oracle shares took a dip in early July after the surprise departure of President Ray Lane, who had negotiated many of the company's major B2B deals and was seen as a balancing force to the more--how do we put this delicately?--eccentric Chairman Larry Ellison. Though a brilliant manager, Ellison has lately been known more for his other exploits, like the notorious cash-for-trash scandal involving Microsoft, and his recently announced bid for the America's Cup. Though Lane is being replaced--at least temporarily--by two executives, the question of succession shouldn't matter much if you're a long-term shareholder. Much of Oracle's success has come from an aggressive sales force and a wide range of rock-solid software products, and those aren't likely to go away anytime soon.
The same reinvention skills are apparent in the management at Houston-based Enron. That company has successfully transformed itself from a traditional natural-gas outfit (complete with a 32,000-mile pipeline) into a middleman for the new economy. Last November, Enron launched an e-commerce site that lets companies trade electricity, coal, gas, and other energy commodities over the Internet. Total amount of deals brokered so far? Try $100 billion, which is more online commerce than anyone else--Amazon.com included. In conjunction, Enron is about to complete a 15,000-mile fiber-optic network that will help it broker the sale of that most precious resource right now, broadband capacity. Need extra pipes to run your telecom network during a busy season? Enron can actually buy bandwidth from one customer with excess capacity and sell it to another. That's a lucrative strategy, given how explosively broadband demand is growing. Gannon at SunAmerica estimates Enron's core gas business can easily grow profits 15% a year--a big jump over its competitors. Tack on the broadband service, which should turn profitable in a few years, and annual earnings growth can top 25%, he says. "Enron is going to become one of the leaders in broadband communications." Not bad for a gas utility.
Considering how rapidly these communication networks are being built, another investing opportunity presents itself: the entertainment companies that can capitalize on them. Our picks in this group include Broadcom (BRCM: $237), Viacom (VIA: $69), and Univision (UVN: $113). We included Broadcom in the entertainment category, rather than in communications, because its products will be the ones powering the entertainment revolution. The Los Angeles-based company makes semiconductors for cable modems, interactive television, 3-D TV, and other gizmos that demand high-speed data transmission. Essentially, its chips get information onto your TV screen faster than anyone else's. Within the next few years, Broadcom's products will help merge TV with the Internet, allowing you to watch your favorite shows and surf the Web simultaneously. This potential has lifted the stock fourfold in the past year and priced it at a nosebleed 255 times forward earnings. But analysts say such optimism is warranted because Broadcom's sales and profits are expected to grow 50% a year for the foreseeable future. Another reason to like Broadcom is CEO Henry Nicholas III, a ferocious competitor with a Ph.D. in electrical engineering who reportedly works 18-hour days. Just the kind of person we want to see running the companies we own.
In the more traditional entertainment category are Viacom and Univision. First, Viacom. Consider for a moment the grocery list of media brands it controls: CBS television, MTV, VH1, Nickelodeon, TNN, Paramount Television, UPN, Showtime, and Comedy Central, along with Paramount Pictures, Blockbuster Video, book publisher Simon & Schuster, and radio's Infinity Broadcasting. With annual sales of $12 billion and expected cash flow of more than $2 billion, Viacom is in position for consistent growth over the decade as its core units continue to play off one another's strengths.
If Viacom is a safe bet, then Univision, a U.S.-based, Spanish-language television producer, is our surprise pick. We have two good reasons for choosing Univision: demographics and dominance. About a tenth of the country's population is Hispanic American right now, some 33 million people, and that number is expected to double to 66 million by 2030. At the same time, analysts project their purchasing power will triple in the next decade.
Conventional wisdom in the Anglo market is that Hispanics will migrate to English-language programming, but the success of Spanish-language radio stations and newspapers, as well as the prominence of Latino pop stars like Ricky Martin, tells another story. Univision has an 82% share of Spanish-speaking U.S. households and is the market leader in cities like Miami, Houston, and Los Angeles. Its formula is a mixture of soap operas, talk shows such as the Oprah-like Cristina, and variety shows like Sabado Gigante, a show reminiscent of Laugh-In. Univision also has an advantage because it is based in the U.S. and its programmers understand the viewing habits of the Hispanic-American audience better than foreign media giants like Mexico's Grupo Televisa do.
As for homegrown competitors, a few years ago, when Sony and Liberty Media bought smaller rival Telemundo--whose audience share is about 15% of the market--investors pounded Univision shares. The two mainstream partners promised to pack Telemundo with hip new programming (including a Hispanic knockoff of Charlie's Angels). But that plan fell flat when most of the new programs bombed, says Blaine Rollins at Janus. He owns 5.5 million Univision shares for the flagship Janus fund and calls it one of his favorite stocks right now. Though Rollins is betting that Univision will keep a wide lead over Telemundo, a little more competition could actually help Univision by drawing more advertising attention to the Hispanic-American market. As it is, Salomon Smith Barney estimates that Los Angeles-based Univision will hit the $1 billion mark in revenues next year, up from $693 million in 1999. And Salomon, for one, considers that 25% growth rate sustainable over the long term.
Our next trend--the money train. Brokerages and investment and commercial banks are sure to benefit from the flood of baby-boomer savings as the hippie, yippie, and "me" brigades stream into retirement. Plus, globalization is creating new markets for mergers-and-acquisitions specialists to set up shop. Let's start with the boomers. Between now and 2010, the number of Americans in their peak savings years (meaning ages 45 to 60) will soar from 60 million to 80 million. The question then becomes, Which Wall Street brokerages can profit from that? We think it's Charles Schwab (SCH: $36), the financial brand most closely identified with baby-boomers. Back in the 1980s and '90s, while traditional firms like Merrill Lynch loaded up on wealthy older clients, Schwab developed a strategy of catching investors early and staying with them as they grew more affluent. Indeed, its average portfolio size has risen sixfold in the past decade, to $120,000. Meanwhile, Schwab took the logical next step last January with the $3.2 billion purchase of U.S. Trust, an investment advisor to some of the wealthiest families in the country. That gives it credibility with the moneyed set, and allows Schwab to offer more equity research to sophisticated investors. Couple that with Schwab's March acquisition of the software firm Cybercorp, which handles discount brokerage trading, and the company that was once viewed as a pure discounter is now the kind of financial services supermarket its snobbish rivals want to imitate. In fact, Schwab says it snags 10% of all new millionaires looking for financial advice.
A play on the second major leg in financial services, globalization, is Morgan Stanley Dean Witter (MWD: $89). Though MSDW competes with Schwab for retail clients and operates a successful online trading site, its biggest draw is its position as a leader in investment banking, meaning M&A, capital market financing, and industry consolidation. In July, Morgan Stanley officially passed Goldman Sachs to become the leading advisor on worldwide deals, handling 226 transactions, valued at $780 billion, in just the first half of the year, according to Thomson Financial Securities Data. At the same time, SunAmerica's Gannon has been buying the stock because it is more diversified than traditional investment banks. MSDW is a safer play, he says, because it's less exposed to market fluctuations that can dry up the IPO market one month and unleash a flood of new underwriting the next. Even with nearly $1 trillion in deals brokered during the past six months, only $5 billion of MSDW's $43 billion in revenue this year will come from investment banking, according to Merrill Lynch estimates. So you get all of the growth and fewer of the wild earnings swings.
The final trend we think you should put money into might just be the most exciting over the next decade--biotech. The sector has been compelling since the early '90s, when Wall Street first started whispering about miracle drugs soon to be discovered. Most of them didn't make it to market, and the biotech sector has seen both massive rallies and dizzying declines since then.
But much has changed in the last year. For starters, the human genetic code has been mapped, more than 126 drugs are on the market, and another 280 are in late-stage trials. A handful of companies look poised to enjoy extended rallies based on these developments, but the strongest is Genentech (DNA: $150). It's been around since 1976, making it an elder statesman of biotech, plus it has a sturdy track record of developing promising medicines. Already the company has eight big-selling drugs on the market--including Rituxan, which treats non-Hodgkin's lymphoma, Herceptin for breast cancer, and Activase, which aids stroke victims. Four new ones are close to getting FDA approval, and dozens more are further back in the pipeline. Among the new drugs is Xolair, an asthma treatment that Kurt von Emster, manager of Franklin Biotechnology Discovery fund, says could be Genentech's next $100 million product.
Beyond the lab, though, Genentech is a powerhouse because it models itself like a drug conglomerate. While smaller biotechs are really just research boutiques, Genentech has the advantage of an aggressive sales force specializing in areas like cancer, cardiovascular disease, and endocrine disorders. On top of that, the company has extensive distribution channels that less established firms need to access through partnerships. And in a sector as promising as this one, that means being able to rack up big profits and rapid growth without having to share them with licensing partners. Analysts say Genentech's sales growth could average 35% a year for the next five years. Operating revenues are estimated to top $1.6 billion this year, and the company is on track for a $351 million profit. Plus, with $2 billion in cash and securities on hand, Genentech has a pristine balance sheet and little cumbersome debt. Says von Emster: "This stock represents a low-risk way to play the largest pipeline of biotech products over the next five years."