Shortly after the publication of last week’s Forever Stock—SiteOne Landscape Supply (SITE)—one of my readers wrote and asked the difference between Forever Stocks and Heritage Stocks.
I will explain.
Forever Stocks vs. Heritage Stocks
A Forever Stock, as I have been writing, is a stock that you buy when it is young and then hold for a very long time, while it grows, and grows, and grows, bringing you profits topping 100%, 500%, even 1,000%.
The intent to hold “forever” is there from the start, and thus the strategy is especially useful when buying stocks for children or grandchildren, or jumping into hot new sectors with huge long-term potential—like marijuana stocks today.
A Heritage Stock, by contrast, is not bought, but is developed. It starts out in your portfolio just like any regular growth stock, but it does exceptionally well, bringing a profit of over 100%. And as you come to recognize that the long-term potential for the stock is particularly great, you also recognize that using normal technical tools to manage the stock will likely result in selling it in the next big correction.
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So to prevent such a sale—and to preserve the potential of seeing your profits compound further—you designate the stock a Heritage Stock, which means simply that you will ignore traditional technical sell signals as long as the long-term prospects for growth in the company and the stock remain good.
The concept of holding stocks “forever” is popular among our readers, yet it is not a strategy that we use to invest because it is unrealistic. What kind of portfolio only buys but never sells?
But the Heritage Stock strategy is one that I have been practicing for years—though long-time readers will remember that the phrase is not my invention but my father’s, coined way back in 1989. Home Depot (HD) was one of our first Heritage Stocks, bought in May 1990, and sold three years later for a profit of 230%. But if we’d held on, the profit today would be 7,780%!
Today, I have two Heritage Stocks in my Cabot Stock of the Week portfolio. One is Tesla (TSLA), bought in December 2011, and now up 884%, and the other is China Lodging Group (HTHT), bought in March 2016 and now up 364% (it hit new highs last week). And I’m working on developing others.
But for new buying, “Forever” is the term we’re keeping in mind with this series, and that means seeking out young firms that have the potential to be the next HD stock, the next AMZN stock, the next AAPL stock, the next GOOGL and the next NFLX.
How to Find Forever Stocks
The key attributes I look for in forever stocks are these:
- A product or service or business model that is revolutionary.
- A product or service or business model that serves a mass market.
- A company that’s still small enough to grow rapidly.
- A company that is not respected—perhaps not even known—by most investors.
- Last, but not least, I look for a chart that shows that other investors have begun to recognize the company’s potential; that tells me that my thinking is on the right track.
For the record, stock #1 in this series was Autohome (ATHM), the Chinese company working to be the center of all consumer-oriented automobile information in China.
Stock #2 was Axon Enterprise (AAXN), formerly known as Taser. The company still sells those stun guns, but has a great new business model based on selling body cameras and in-car cameras to police departments, collecting the resulting video and storing it in the cloud, and thus generating great recurring income.
Stock #3 was Zillow (Z), the king of real estate information in the U.S., and still growing at a good pace, with revenues up 27% last year.
(Note: these are not in alphabetical order. Instead, each week I’m highlighting the stock that’s at the best short-term buy point.)
Stock #4 was Square (SQ), the company that began by enabling small merchants to process digital transactions on a phone or tablet, and has evolved to provide a wide range of software and hardware products, all designed to empower merchants of any size to serve their customers more effectively.
Stock #5 was SiteOne (SITE), the company that was spun off from Deere & Company in May 2016, and is now the largest (and only national) supplier of landscape products in the U.S., and has huge potential to keep growing by acquisition.
And Stock #6 is:
Best Forever Stocks in 2018: GrubHub (GRUB)
GrubHub is the leading online and mobile food ordering service in the U.S., enabling more than 80,000 takeout restaurants in over 1,600 U.S. cities and London to present their wares to more than 14.5 million active users. The firm’s brands include Seamless, Eat24, AllMenus and MenuPages.
And GrubHub recently signed a deal with Jack in the Box that not only adds the company’s hundreds of locations across the U.S. to its menu options but also integrates GrubHub’s point-of-sale system into Jack in the Box’s in-house system, allowing operators to manage all orders (in-house and delivery) from one system.
From $17 million in revenues in 2011, the firm has grown to $683 million in revenue in 2017, so it’s not exactly small anymore, but the growth rate is still impressive, in part because the market for meal delivery has absolutely massive growth potential.
Plus, the firm has been profitable since very early on, as there’s very little physical investment; it’s all in the cloud!
In the first quarter of 2018, revenues were $233 million, up 49% from the year before, while earnings per share were $0.52, up 79% from the year before. After-tax profit margin was 20.3%, the highest of the past four years.
As to the chart, GRUB has climbed from 17 to 112 over the past two-and-a-half years, so it’s definitely not undiscovered (but I think that’s offset by the huge potential of this market sector). Since that peak in March, the stock has pulled back—in sympathy with the broad market—to support at 93, and now it’s working at building a base in the 100 area.
I think it’s a decent entry point if you’ve got a very long horizon.
Note: GrubHub was my top pick at the 2017 Cabot Wealth Summit last September, and it’s up 90% since then. But it was also added to my Cabot Stock of the Week portfolio that same week—and I was knocked out soon after as the stock had a sharp correction in October and November.
All of which goes a long way to illustrate that the art of holding stocks—or not—is at least as important as what stocks you buy in the first place.
If you are looking to add additional strong stocks to your portfolio, consider taking a subscription to Cabot Stock of the Week. Each week, I present the best recommendation I pick across seven Cabot advisories.
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