10 Stocks to Buy and Hold Forever
First Solar (FSLR)
Tesla Motors (TSLA)
Over the past seven years, I’ve been running an occasional series here titled, “10 Stocks to Buy & Hold Forever.”
Here’s how it works.
I ask all the Cabot analysts to give me the names of one (or two or three) stocks that they’d like to buy and hold forever.
I study their candidates, narrow the list down to 10, and then write about them, one stock at a time, over the weeks that follow.
The results over the past seven years have been great.
But before I review the results of the latest crop of stocks, let me tell you the roots—and more important, the logic—of this particular investing system.
It started back in 1972, when a fellow named Thomas W. Phelps wrote a book about the ultimate buy-and-hold investing strategy. Called “100 to 1 in the Stock Market,” the book touts a strategy that can bring you profits of 10,000% or more in stocks.
That’s like turning $1 into $100. Or more impressively, turning $10,000 into $1 million.
The strategy? Never selling. Just buying and holding.
That’s something nobody talks about anymore, in part because it’s simply too easy to trade these days and in part because there’s so little confidence.
But the system works, if you choose your stocks right.
So let me tell you a little about Mr. Phelps.
He spent 40 years in the investment business. Over the decades, from just before 1929 to the mid-70s, he was an analyst, columnist, financial advisor, private investor and author. In the early 80s, after Mr. Phelps had retired to Nantucket, my father and brother visited him and bought his remaining stock of books, and for years we doled them out as bonuses to subscribers.
Mr. Phelps’ method was not complex. You didn’t have to get in on the IPO. You didn’t need to buy at the bottom. You just needed to be really, really patient. And you needed to have the intelligence to pick the right “forever stocks.”
And these stocks are not that rare!
In fact, Mr. Phelps went back in history and found that, beginning in 1932, there were over 350 stocks in which you could have turned $1 into more than $100. He ended his study in 1971.
Admittedly, starting in 1932 (after the crash) is a little like cheating. But only a little. Mr. Phelps found that in every year thereafter, there was at least one stock you could have bought that could have turned $1 into $100 by 1971. The last one in his study was bought in 1967 and thus accomplished the feat in just four years. (It was Development Corp. of America, which was acquired by Lennar in 1986.)
No doubt there have been hundreds more since.
But why do so few people amass these types of profits? Mr. Phelps said it was because so few people try!
“The reason that more people don’t make 10,000% on their money is that they don’t set their goals high enough!”
And these days, when our perspective is so short, and people are happy with a profit of 20% earned in two weeks, it’s even rarer than it was then. Low commissions and fast-breaking news all conspire to make us sell . . . so that we can move on to the next hot stock.
But there’s one big reason to buy and hold that existed then and still exists now, and that will undoubtedly exist decades hence. It’s the taxman. The best way to prevent Uncle Sam from getting a share of your hard-earned profits is to never sell. Pass the stock on to the next generation!
How do you find these big winners?
According to Mr. Phelps, you look for companies that provide:
1. Inventions that enable us to do things we have always wanted to do but could never do before.
2. New methods or new equipment for doing things we long have had to do but doing them easier, faster or at less cost than ever before.
3. Processes or equipment to improve or maintain the quality of a service while reducing or eliminating the labor required.
4. New and cheaper sources of energy.
5. New methods of doing essential jobs with less or no ecological damage.
6. Improved methods or equipment for recycling the materials used by civilized man instead of making mountains of waste and oceans of sewage.
7. New methods for delivering the morning newspaper without carriers or waste.
8. New methods or equipment for transporting people and goods on land without wheels.
There’s an interesting earth-friendly twist to the list that reflects the sentiments of 1972, and #8 was a nod to maglev trains (he should have said without gasoline!), but other than that I can’t argue with the list.
Mr. Phelps goes on to point out that a stock should be bought when the company is still small and undiscovered by the masses. Small companies grow faster.
He also dwells on “gates,” which we typically call barriers to entry or moats. Patents and market leadership are valuable here.
He writes about earnings, stressing that you want to find the most profitable businesses, where earnings are growing fast.
And he doesn’t minimize the value of buying when stocks are temporarily depressed … as they were in 1932 and, more recently, 2009.
The most important aspect of all in the equation, however, is time. Says Mr. Phelps, “Perhaps the greatest advantage of all in buying top quality stocks without visible ceilings on their growth is that when we do so we give ourselves the chance to profit by the unforeseeable and the incalculable.”
To me, these last five words are magic.
The way I see it, too many investors overvalue facts—even fuzzy facts, like next year’s earnings estimate—and undervalue the unforeseeable and the incalculable.
People find confidence in thick reports full of numbers, even though most of the numbers will soon be proven wrong.
People also find confidence in crowds. They’d rather own a big old company that everyone respects—which is growing at just 5% a year—rather than a young company in the same industry that has the potential to double its business in one year, but has little respect yet.
Me, I’d rather look elsewhere, In fact, I feel better being apart from the crowd.
For me, the Holy Grail is this:
1. A product or service or business model that is revolutionary.
2. A mass market.
3. A company that’s still small enough to grow rapidly.
4. A company that is not respected—perhaps not even known—by the majority.
5. And last but not least, a stock that’s trending up, indicating that investors’ perceptions of the company are improving. This is important because perceptions are always at least as important as reality—whatever that is. Is Bank of America’s $4 billion “mistake” real or something else? I don’t know, but the chart tells me that investors’ perception of Bank of America today is not favorable.
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Last Year’s Results
The last time I ran this exercise, the stock selections were announced and described over a three-month period running from mid-December 2012 to mid-March 2013.
Here are the results, with gains as of mid-day Friday, May 2.
The average gain from the recommendation date until now is 79%.
The median gain is 25%.
Also, there were no losses, a fact I have to credit at least partially to the broad bull market of 2013.
Lastly, I was very lucky to be the nominator of the top two performers, stocks that I think are still worth discussing today.
First Solar (FSLR) was a great performer for Cabot back in the first great bull market in solar stocks back in 2007. We nailed down a profit of 97% back then, and were very happy to be out of the stock as the group crashed and burned in the years that followed.
But the industry is more mature now, as are the leading stocks, and the best, which include First Solar, are indicating a bright future.
First Solar has grown revenues every year through this transition phase, but earnings slumped from 2011 through early 2013. Now, all systems are go, as analysts are projecting earnings growth of 86% in 2015. And the stock looks good, too.
It spurted to a high of 75 in late March after management gave very bullish first-quarter guidance, and since then, while most growth stocks have been hit hard, FSLR has pulled back calmly, nearly touch its uptrending 50-day moving average before finding support. I think a base around 70 will eventually lead to a breakout to new highs, and FSLR is certainly a contender to be on the new list of 10 Stocks to Buy and Hold Forever.
But first we’ll have to see what the company reveals in its first-quarter earnings report, coming out tomorrow after the market close.
Tesla Motors (TSLA) was the leading glamour stock of 2013, but it didn’t start out that way. The company had lost a whopping $3.20 per share in 2012, and investors as a whole were uninterested.
But it fit every one of my criteria!
1. Tesla’s American-made electric cars were truly a revolutionary product, offering high-performance and beauty in an environmentally friendly package.
2. It aimed to serve a mass market; most of us own cars, and the Chinese car market is booming.
3. It was still small, and thus able to grow rapidly.
4. It was not well respected, and thus had lots of potential upside if perceptions improved.
5. And the stock was going up, not rapidly, but stealthily and steadily.
So what did it take to get the stock going?
It wasn’t awards for an awesome product.
The previous November, the company’s Model S had won Automobile Magazine’s Automobile of the Year award, and Motor Trend’s Car of the Year award. That impressed me and other car aficionados, but it didn’t impress analysts. They were looking for earnings.
April 1, 2013 brought an announcement that first quarter sales had exceeded targets, and that gave the stock a modest boost.
But it wasn’t until earnings were actually announced in mid-April that the stock truly blasted off—and it kept going right into September.
In that six-month period, Tesla moved to the front of the stage, and not just the Wall Street stage. The company became a darling of Silicon Valley, where its cars are made. And it became a darling of Hollywood—Brad Pitt, Matt Damon, Morgan Freeman and Tony Hawk are just a few of the celebrities seen driving around in Teslas.
The spotlight was so intense, in fact, that the advance was unsustainable. The stock just had to cool down. As traders bailed out and took their profits, people who had got on board too late lost money, and a quick eight weeks later, the stock was down 40%.
But the stock wasn’t done! As the bull market matured, TSLA was brought back to center stage, and quickly moved out to new highs, eventually peaking in late February at 265, for a gain of 654% since my recommendation.
Since then, the stock—like most growth stocks, has pulled back into a consolidation pattern. Technically, it’s lost momentum, dropping clearly below its 50-day moving average. But it’s sitting above its peak of last September, a level of support. And it’s still above its uptrending 200-day moving average.
So the long-term technical picture is still positive.
As to the fundamental picture, I’m still very optimistic about it, not least because I very much enjoy driving my own Tesla Model S, which was delivered last September.
And I’m very much looking forward to management’s report on the first quarter of 2014, which will be released after the market close on Wednesday, May 7.
So TSLA, like FSLR, has a shot at being a repeat member of this year’s crop of 10 Stocks to Buy and Hold Forever.
The first stock will be revealed next Monday.
But if you really want advice on investing in TSLA, I recommend that you join the readers of Cabot Stock of the Month. Those who followed my advice bought in December of 2011 at 29. They’re sitting on profits of 620%.
And while there’s little chance TSLA will repeat that feat in the year ahead, I do highlight one great stock every month, and I’m already searching high and low for the next TSLA.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More