BID & ASK: My Top 10 Stocks for the Next 10 Years....fwiw
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Tom Byrne (1/19/00)
This article concerns my top 10 stocks to own for the next decade.
I concentrated this portfolio in three areas: financial services, telecommunications and pharmaceuticals. According to the abundance of demographic data we are supplied with, either by government agencies, independent firms or think tanks, these three industries hold the greatest potential for the next ten years.
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My one exception to this industry concentration was Home Depot (NYSE: HD - Quotes, News, Boards), which is the best run company in the retailing sector, and may be the best run company in America - period.
Some may question United Parcel Service (NYSE: UPS - Quotes, News, Boards) fitting into one of these three industries. Although UPS is like trying to fit a square peg in a round hole, I consider it a financial services company and a telecommunications company, because it provides both services to its customers. I think of UPS as one of the best technology companies in the country that just happens to deliver packages.
In order to make my venerable list, companies had to dominate their industry with at least a 20% share of the market in terms of sales. This was the most important criterion for qualifying. I was looking for companies that were so entrenched and dominant in their industries that it would take a Herculean effort just to compete with them, let alone take away their number one status.
I added one non-financial screen to my list. In order to make my list, a company had to have powerful name brand recognition. Not only did it have to dominate its industry in terms of sales, but also it had to be the recognized leader in the industry in terms of consumer perception.
A case where a company did not make this grade is General Motors (NYSE: GM - Quotes, News, Boards). GM dominates its industry with about 25% of the domestic car market and it is the largest car company in the world, in terms of total sales and number of cars sold. But it does not have compelling name brand recognition. Ford (NYSE: F - Quotes, News, Boards) and DaimlerChrysler AG (NYSE: DCX - Quotes, News, Boards) have as much, if not more, name brand recognition than their larger rival.
At this point I had about 35 companies that dominate their industries and have unrivaled name brand recognition. Next I submitted these stocks through a fair value screen. I estimated cash flows for the next ten years for these 35 companies, discounted those cash flows back to the present at a rate of 10% (which is slightly below the 11% historical rate of return for stocks during the 20th century), and arrived at a fair value.
Any company trading above its fair value was kicked out. An example of one loser from this screen was Nike (NYSE: NKE - Quotes, News, Boards). Although it dominates the sneaker industry, and on a broader scale, the athletic apparel industry, and has powerful name brand recognition, Nike?s future cash flows are in jeopardy of declining. In the latest quarter, ended August, Nike?s operating cash flow declined by 15%.
Next up was return on equity (ROE). In order to make my Ten for Ten list, a company had to have an average return on equity of 15% for the last five years and the latest twelve months. The only exception here was UPS, which does not have 5-year track record as a public company. I was, however, assured by insiders at the company that its ROE has easily exceeded 15% for the last five years as a private company.
That left me with 12 stocks. I made a couple of judgement calls, based on growth prospects and industry position, and pared the list down to ten.
My Ten for Ten portfolio looks like the Hall of Fame for corporate America. This list of ten stocks puts any mutual fund manager?s portfolio to shame. These are not only the top ten companies in America, but arguably, they are the top ten companies in their fields in the world. Some may argue that Merck (NYSE: MRK - Quotes, News, Boards) is not the top drug company in the world.
After Glaxo-Wellcome?s (NYSE: GLX - Quotes, News, Boards) acquisition of SmithKline Beecham (NYSE: SBH - Quotes, News, Boards), Merck becomes the third largest drug company in the world behind Aventis and the newly-named Glaxo SmithKline. But both of those companies operate in markets where the governments decide the price of drugs, not the markets, and that is a distinct disadvantage for them.
The table below represents the best ten stocks to own for the next decade. I have included market share in terms of sales, the company?s return on equity for the latest twelve months and its price/cash flow ratio.
Buy an equal amount of each company. For example, if you have $5,000 to invest, buy $500 worth of each stock. Then read Washington Irving?s ?Rip Van Winkle, A Posthumous Writing By Diedrich Knickerbocker,? fall asleep for ten years, and when you wake up you will be stinking rich.
Just for kicks, I will mention some of the honorable mentions that made it to the final cut, but were edged out by their more powerful peers. Merrill Lynch (NYSE: MER - Quotes, News, Boards), Boeing (NYSE: BA - Quotes, News, Boards), Oracle (NASDAQ: ORCL - Quotes, News, Boards), Warner-Lambert (NYSE: WLA - Quotes, News, Boards), and Apple Computer (NASDAQ: AAPL - Quotes, News, Boards), which incidentally controls 100% of the Mac computer market, but only about 11% of the overall computer market, could have easily made this list, if it wasn?t for my judgement of the company?s fair value or its ROE track record.
Ticker Company Price (1/17/00) Market Share Return on Equity Price/Cash Flow
AOL America Online $63.25 78% 25.1% 122.2
CSCO Cisco Systems $107.56 73% 17.9% 79.7
SCH Charles Schwab $41 45% 24.4% 65.3
HD Home Depot $61.94 44% 18.5% 44.8
INTC Intel $103.06 77% 26% 22.1
MRK Merck $74.13 100%* 41% 27.8
MWD Morgan Stanley DW $137.31 20% 23.5% 8.2
MSFT Microsoft $112.25 88% 28.4% 52.4
SUNW Sun Microsystems $80.38 65% 21.4% 32.2
UPS United Parcel Service $69.06 55% 24.3% NA
*For some drugs, Merck controls 100% or very close to 100% of the market. In terms of sales, Merck is the largest U.S. pharmaceutical company.
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