Ihe year has been a trying one for the investment community. Since hitting their respective closing highs in the past seven months, the famous Dow Jones Industrial Averagereference S&P500and dependent on growth Nasdaq Compound have lost 19%, 24% and 34% of their value, as of June 16, 2022.
While steep declines in the stock market can be worrisome, historical data shows that buying during these lows is a stroke of genius. Over long stretches, every notable decline in major US indices was eventually erased by a bull market. The key to success, besides buying stakes in high-quality, innovative companies, is letting time work its magic.
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With stocks well below their all-time highs, a number of innovative companies stand out as incredible values for patient investors. Here are five surefire stocks that have the ability to create generational wealth over the next 25 years.
Intuitive surgery
Initially, robot-assisted surgery system developer Intuitive surgery (NASDAQ: ISRG) offers significant wealth potential for long-term investors thanks to its sustainable competitive advantages.
By the end of the first quarter, Intuitive Surgical had installed 6,920 of its da Vinci Surgical Systems in hospitals and surgical centers around the world. This figure is several times higher than that of its closest competitor. But what is far more important to recognize is that the cost of these systems, coupled with the training provided to surgeons to operate them, makes very unlikely that customers will ever switch to a competitor. Buyers of the Da Vinci system effectively become long-term cash flow for the company.
Intuitive Surgical’s razor and blade operating model is its other big selling point. Although its surgical systems are expensive, they are complex to build and therefore produce only mediocre operating margins. As the installed base of da Vinci systems has increased, the percentage of instrument sales sold with each procedure, as well as system maintenance, has increased. These segments generate significantly higher operating margins and are what can propel Intuitive Surgical’s valuation much higher over the next quarter century.
Berkshire Hathaway
For more than 50 years, few investments have been more “foolproof” than following in the footsteps of billionaire investor Warren Buffett. Since becoming CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) in 1965, the Oracle of Omaha led its class A shares (BRK.A) to an annualized return of 20.1%, until December 31, 2021. On an aggregate basis, we are talking about a return of 3,641,613%.
One of the main reasons for Berkshire Hathaway’s resounding success is Buffett’s affinity for loading his firm’s investment portfolio with cyclical companies. Buffett is well aware that it is impossible to predict when a recession might occur. But he realizes that periods of economic expansion last significantly longer than recessions. By investing in industries he knows well and buying stakes in companies that will benefit from long-term expansions, he has prepared his business to thrive on the natural growth of the US and global economy.
Berkshire Hathaway’s historic outperformance also appears to be a function of its mountain of passive income. Over the next 12 months, Buffett’s company is on track to collect north of $6 billion in dividend income. Dividend stocks have a long track record of outperforming their non-dividend paying counterparts; and Buffett tends to hold these dividend-paying stocks for years or decades at a time.
Image source: Getty Images.
MasterCard
A third surefire stock with the ability to generate life-changing wealth over the next quarter century is the payment processor. MasterCard (NYSE: MA)which I will add is a Berkshire Hathaway operation.
Mastercard is the perfect example of how long-term investors can play a simple numbers game and come out on top. Although recessions usually lead to lower consumer and business spending, economic contractions usually don’t last long. Mastercard benefits from disproportionately long periods of economic expansion and the higher spending that comes with them.
It is also important to note that Mastercard acts strictly as a payment processor and not as a lender. Although he has the ability to collect interest income and fees, becoming a lender would expose him to defaults and write-offs during times of economic weakness. Not having to set aside capital is the main reason why Mastercard rebounds faster than most financial stocks after recessions.
Finally, most global payments are still made in cash. This gives Mastercard a sustainably long track to push its payments infrastructure into underbanked regions and faster-growing emerging markets.
Etsy
Assuming it’s not acquired, a specialty e-commerce retailer Etsy (NASDAQ: ETSY) has all the tools and intangible assets needed to create a life-changing legacy over the next 25 years.
While most online retail platforms are built purely for volume and lack a lot of customization, Etsy’s retail platform is built with engagement in mind. The company’s merchant network is almost entirely made up of small businesses that manufacture unique or customizable products. While there are considerably larger e-commerce players out there, none are a direct competitor to what Etsy can offer from a personalized/personalized standpoint.
The other impressive aspect was Etsy’s ability to turn occasional buyers into repeat buyers. A “Repeat Shopper” is a term used by the Company to describe someone who makes at least six purchases totaling $200, in total, during the 12-month period.
Between the end of 2019 (i.e. before the pandemic) and the end of 2021, the number of repeat buyers on the platform increased by 224%. This increase is what allows Etsy to charge merchants higher fees for advertising and analytics, and testifies that investments in its platform designed to drive user engagement are working.
Alphabet
Finally, although it is already one of the largest public companies in the world by market capitalization, Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) is a surefire stock that can build generational wealth over 25 years. Alphabet is the parent company of the Internet search engine Google and the YouTube streaming platform.
The fundamental segment of the business is Google, which has grown its sales fairly steadily by double-digit percentages over the past two decades. According to data for the past 12 months provided by GlobalStats, Google accounts for 91% to 93% of the global search engine market share. If businesses want to reach users, they know paying a premium to advertise with Google is their smartest option.
But what’s even more exciting for Alphabet is the growth of its ancillary segments. The aforementioned YouTube is the second most visited social site on the planet. Meanwhile, cloud infrastructure service provider Google Cloud ranks third in global cloud spending. Google Cloud has been growing its sales by around 45% to 50% per year, and spending on cloud services is still, arguably, in its infancy.
Considering that cloud services operating margins can leave advertising margins in the dust, Alphabet’s operating cash flow could take off by mid-decade.
10 actions we prefer to Intuitive Surgical
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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Sean Williams holds positions in Alphabet (A shares), Intuitive Surgical and Mastercard. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Berkshire Hathaway (B shares), Etsy, Intuitive Surgical and Mastercard. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
