The bond yield curve has inverted, the U.S.-China trade war rages on, and Brexit is edging closer with a deal not yet in sight. In uncertain times such as these, finding investments that can weather the storms and do well in the long-term seems all but impossible.
The rapid pace of technological change means that start-ups can grow into unicorns in a matter of years, but it also means that companies become obsolete quicker. The average age of an S&P 500 company is less than 20 years, down from 60 years in the 1950s, according to Credit Suisse.
While no investment is perfectly safe, some companies are more likely to stand the test of time than others. In particular, those that have valuable intellectual property or a big brand; those that can withstand major technological disruption and adapt in a quickly evolving environment.
Spotting such companies isn’t easy, but it’s a worthwhile endeavor. We have asked a range of investment experts to tell us what their “forever stocks” would be.
The Walt Disney Co
“Long-term investors should look for companies that have a record of successfully navigating change,” says Rachel Winter, associate investment director at U.K. investment firm Killik & Co. She mentions three-star rated Walt Disney Co. (DIS) as one example.
The company recently celebrated its 95th birthday, after adapting to an evolving media world again and again. “From silent films in the 1920s, its first feature-length film (Snow White) in the 1930s, to the 1940s during when 90% of Disney employees were working on war-related training films,” says Winter. The post-war years brought a successful venture into television and the opening of Disney World. “Today Disney is a media giant with a vast library of valuable content that is poised to take on the next big thing in entertainment: online streaming.”
With a huge market cap of US$243 billion, shares are currently trading at US$135.20, just above the Morningstar fair value estimate of US$130.
"We assign Walt Disney a wide economic moat rating. Its media networks segment and collection of Disney-branded businesses have demonstrated strong pricing power in the past decade", says Morningstar equity analyst Neil Macker. "We believe that the addition of the entertainment assets from Twenty-first Century Fox should help the firm continue to generate excess returns on capital despite operating in the increasingly competitive media marketplace," he says.
Compass Group
“We all need to eat, and FTSE 100 two-star rated Compass Group (CPG) is the largest catering group in the world, providing 5.5 billion meals a year,” notes Graham Spooner, investment research analyst at U.K. stock brokerage The Share Centre.
Formed in 1941, the group has operations in 45 countries and is involved in providing food to workplaces, schools, colleges, defence establishments, hospitals and the leisure industry. It also runs coffee shops, vending machines and bakery outlets.
Sales are spread across many regions and sectors and are especially strong in North America and Europe. Spooner adds: “We take the view that Compass is a defensive business and therefore likely to be less susceptible to economic downturns and barring any disasters, should still be satisfying consumer demand well into the future.”
Morningstar equity analyst Micahel Field believes Compass Group is well positioned to benefit from several structural trends, including consolidation of the food service industry and the continued shift toward outsourcing catering services in the private and public sectors. He recently raised the stock's fair value estimate to account for time value of money changes.
Unilever
Ian Woolley, senior investment analyst at U.K investment firm Hawksmoor Investment Management, argues that a “forever stock” in 2019 must not only serve an enduring beneficial purpose, but also have the longevity to see it through the decarbonisation revolution.
His pick is two-star rated Unilever (ULVR), the firm behind a number of household brands including Dove soap, mayonnaise-maker Hellman’s and Wall’s ice cream. “Chances are high that we will still be washing ourselves and eating ice-cream in fifty years’ time.” He argues that Unilever is likely to survive, because it is “actively reducing its environmental impact, including a 2030 net carbon positive target, and building resilience into its supply chains, such as the work in does on sustainable palm oil production.”
In addition, the company has “an enviable history of consistently high margins and returns through the economic cycle.”
Morningstar director Philip Gorham says, "We continue to believe Unilever has a wide economic moat due to economies of scope and the benefits of its category leadership positions, but it is clear from these results that growth remains very slow, in spite of the company’s emerging market footprint."
Strix Group
While the alternative investment market might not be a traditional hunting ground for “forever stocks” Alex Davies, chief executive of U.K. investment firm Wealth Club, likes Strix Group (KETL). The firm designs and makes components for kettles across the world. “Pick up a kettle and chances are you’ll see Strix’s name on the base given its dominant 38% global market share. Such is its ubiquity, that its safety controls are used more than 1 billion times a day by 10% of the world’s population,” says Davies. The company has been around since 1951.
Davies likes that the group is growing in developing markets and the US, where “kettle penetration has reached a tipping point given a newfound love for tea.” With strong patent protection, constant innovation and scale benefits, the group should get even stronger over time, he adds: “A new, bigger factory is being built in China with a 50-year lease signed for use of the land. While not quite the 9,000 years of Guinness, it points to many years of future growth to come.”
Johnson & Johnson
Bettina Edmondston, global investment analyst at U.K. investment firm Saracen Fund Managers, likes three-star rated Johnson & Johnson (JNJ), the world’s largest healthcare company with over 260 operating businesses in 60 countries.
“The company is very diversified with leading positions in pharma, medical technology and consumer health, all of which are long term growth areas, especially medical technology with its exposure to eyecare, hips, knees and surgical equipment,” she says.
Some 70% of the group’s revenues are in areas where Johnson & Johnson is the global No. 1 or No. 2. What’s more, some 25% of sales come from products launched only in the past five years, which demonstrates the firm’s strong research and development capabilities.
The company has a strong track record of growth and its dividends have increased for each of the past 56 years. Edmonston concludes: “In short, JNJ is a world leader with a well-diversified and long-term growth profile, as well as a strong balance sheet and sustainable dividend growth. We would happily own this forever.”
Earlier this week, in one of the first state opioid cases, an Oklahoma judge ruled against Johnson & Johnson, awarding the state US$572 million, well below the over US$17 billion the state was seeking in damages. The amount is lower than many had expected, and J&J still plans to appeal the case.
"We expect the appeals process to take several years, and on appeal, we believe the amount will fall lower as we believe J&J largely provided appropriate marketing support around its opioid drug sales. Overall, we don't expect any change to our fair value estimate or moat rating for the company based on the ruling, and we continue to model in $1 billion in total opioid litigation costs for J&J," says Morningstar sector director Damien Conover.
