The mistake we all make at some point is to think we have to unearth the next trillion dollar firm before anyone else. That would be an incredibly lucrative skill but it’s not really what we need to focus on when we’re investing for the long term.
Taking a punt on which firm looks set to rocket is just that, a punt. Instead we can aim to hold companies already showing their strength. Market leaders with the ability to earn high margins and stave off the competition tend to find their forever-home in long-term portfolios.
Some investors try to identify steady compounders and keep them as core holdings to complement more opportune investments. Others have built careers on staying away from the fads and buying stocks able to consistently generate above average earnings and staying power.
Here are three examples of stocks those quality growth fund managers tend to gravitate towards. They are just illustrations of the theme due to their characteristics so you shouldn’t take them as a recommendation to buy or sell any security.
Remember, your own tolerance for risk, time horizon and financial goals should inform which assets you invest in.
Our resource hub for investing in the stock market might be able to help make that blend a bit clearer for you and our guide on how to invest in stocks is a great start for first-time investors. And if you are still unsure of how to pick investments, speak to a qualified financial advisor.
It’s easy to look at Diageo’s stable of leading brands like Guinness, Smirnoff and Johnnie Walker and see the appeal in owning a bit of the lot. But the strategy is a bit more nuanced than that.
The company has spent a few years not just expending the offering but bringing in premium options too.
It now has Ryan Reynolds’s Aviator Gin as a super-premium gin option to complement Gordon’s and Tanqueray. Having the options to suit the wave of premiumisation is a good sign of the company’s ability to pivot and plan on the back of consumer sentiment.
Gin now accounts for 5% of revenues, up from 2% five years ago. And, on the whole, the company’s sales are 24% in super-premium and 29% in premium.
But Mother’s Ruin isn’t getting all the attention.
Diageo coughed up $700m for George Clooney’s Casamigos tequila brand in 2017 (what is it with actors and spirits?) potentially rising to $1bn if it sells well over the following 10 years.
That certainly seemed like a hefty price tag at the time, especially with popular brands Sierra and Patrón out there already (the latter was sold to Bacardi in 2018 for $5.1bn).
But that might have been a very well-timed deal indeed. Tequila now makes up 7% of Diageo’s revenues versus 1% five years ago.
The goal here is clearly to amass a collection of unique and differentiated products consumers are loyal to, and have a squad that can swap leadership between themselves when certain tastes take off.
Diageo is also part of the UK dividend aristocrat crew, having increased its dividend or kept it level for at least 10 years. If you’re holding for the long term, consistency is key, both in commitment to dividends and in never resting on laurels, however proud of its brands a firm is.
A lot of healthcare stocks prompt talk of patent cliffs or investors crossing their fingers in the hope of positive trial results.
It’s true that life-changing medical developments can spike share prices, but unsuccessful trials are just as common.
That becomes even more of an all-or-nothing the more you get into biotechnology and fringe therapeutics, with companies’ futures hanging in the balance.
But that’s not the whole healthcare sector. Stryker makes everything from disinfectants to implants used in joint replacement to patient room furniture.
It is a high-quality company with a unique operating business and a profit margin of around 20%.
Stryker has its flagship product Mako - a robotic arm that gives a more predictable surgical experience when performing joint replacement surgery.
That side of the business has a steady order book even with the hurdle of the pandemic. And concentrating on addressing hip and knee surgery keeps the firm away from much more invasive practices and capital intensive machinery.
The goal here is to have a repeat, dependable customer base when it comes to Mako, and it seems like that’s already developing.
But, just like Diageo, Stryker has recognised the need to have a diversified range of products.
Mako is the cash cow for now but it also has interests in artificial intelligence for healthcare and has even ventured into 3D printing with its lumbar cage implant used in spinal surgery.
Amid the sectoral pulls towards all-or-nothing products and treatments, Stryker’s focus on raking in persistent cash flows and developing long-term business partners, as well as operating a wide range of revenue sources, points more towards consistency than most of the sector.
We all want to get out and spend right now, and no one wants to accept cash. That’s a trend we’ve seen coming for a few years but it suddenly feels more like a necessity.
The change in payment architecture is accelerating across the board as a result. Market stalls and businesses alike want efficient book-keeping, quick payment times and no hassle.
That means firms facilitating those transactions are hitting their stride. And that trend looks likely to stick around.
It took us a while to make the leap from cash to card and we have kept a bit of both on us for a long time.
Debit cards have now overtaken cash as the UK’s most popular payment method though. The next step will be card to phone and already making that easy are the likes of iZettle and Venmo, both owned by PayPal.
There may still be big card companies out there but a lot of them are built on legacy tech and have huge workforces in high rise buildings to deal with.
Nimble entrants with simple offerings and low fees have the chance to change with the times and keep up with consumer preferences.
These investors know there is a transition here.
Like we said at the top, good investing isn’t necessarily about backing yourself to time that transition perfectly. It’s about setting yourself up to take advantage of these themes playing out over the long term.
What's your take on the investment case for these stocks? Do you have any 'forever stocks' of your own? Let us know on the community forum: