Of all the ways to make money as an investor, perhaps the most rewarding is buying a stock when it is young and then holding that stock for a very long time, while it grows, and grows, and grows, bringing you profits topping 100%, 500%, even 1,000%. At Cabot, we call these forever stocks.
Most experienced investors can easily name stocks that they wish they still owned—stocks that have doubled many times over the years. These include not only today’s big winners like Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL) and Netflix (NFLX) but also stocks that were previously hot and are bigger and growing more slowly now, like Carnival (CCL), Cisco (CSCO), Disney (DIS), Home Depot (HD) and Microsoft (MSFT).
But most investors who once owned these stocks don’t own them anymore.
So why are so few investors able to hold winning stocks long-term?
It may be because they get nervous about short-term concerns. Or because they lack conviction. And often, because they become seduced by other stocks, and sell their old winners for modest profits instead of hanging on for the bigger, longer-term payoff.
And then, years later, they often wake up and say, “I wish I’d held onto those shares.”
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So from time to time I run a series on “Forever Stocks,” to remind my readers of the virtues of holding stocks for a really long time.
But note this—the goal of this article is not to identify forever stocks that can give you a modest long-term return, like Johnson & Johnson (JNJ) and DuPont (DD). Those stocks are fine for conservative investors working to keep their wealth, but my goal is to identify stocks that can make you rich!
I want to identify 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.
And Stock #5 is SiteOne.
Forever Stock #5: SiteOne Landscape Supply, Inc. (SITE)
SiteOne is working to do for the landscape supply industry what Home Depot did for the building materials and home improvement industry—create a national brand that uses economies of scale to provide a better experience for the customer.
The difference, however, is that while Home Depot grew by building new stores, SiteOne grows by acquiring existing businesses.
SiteOne was spun off from Deere & Company in May 2016, and it’s now the largest (and only national) supplier of landscape products in the U.S. With 516 stores in 45 states and five Canadian provinces, the firm offers about 120,000 items, including irrigation products (31% of sales), fertilizers (24%), nursery items (16%), pest and weed control products (12%), landscape accessories (8%), hardscapes like paver stones (5%) and outdoor lighting (4%). It’s the only one-stop shop for commercial and residential customers. In total, SiteOne has four times the market share of its next largest competitor.
Yet despite its dominant position in the landscape supply field, SiteOne has just 10% of the market (estimated at $16 billion). Said another way: 90% of the industry’s sales come from smaller, often local competitors. SiteOne tops them by using its scale (buying power) to attract customers, and often, by simply acquiring these local and regional competitors.
SiteOne made four acquisitions in both 2014 and 2015, six in 2016, eight in 2017, and already this year it has made four more: Terrazzo & Stone Supply of Seattle, Washington; Pete Rose of Richmond, Virginia; Atlantic Irrigation, with 33 locations along the East Coast; and Village Nurseries of California. As these firms are integrated, synergies kick in, leading to higher margins and an overall stronger competitive advantage. Right now, SiteOne is the only industry consolidator.
Looking at the first-quarter numbers, we see that revenues grew 11% from the year before to $371 million, with acquisitions contributing 8% of the growth; gross profit increased 8% to $109 million; and adjusted EBITDA decreased to a loss of $5.1 million, compared to EBITDA of $1.2 million last year (a late spring was to blame).
It looks like a rock-solid business strategy, but having good management doesn’t hurt. That’s why it’s nice to see that leading the way at SiteOne is CEO Doug Black, a West Point graduate who for 18 years headed up OldCastle, a huge building-materials supplier. Black took that company from $900 million in sales to $12.6 billion, with acquisitions playing a key role. He’ll be doing the same for SiteOne in the years ahead.
As for the stock, it came public in May of 2016 and has been working its way higher since, with the occasional pause to allow valuation to catch up. As I write, the stock has been on pause for five months, building a base between 70 and 80, and I think this base provides a solid entry opportunity, especially if you can buy in the lower end of the range. Then just hold on, keeping the Home Depot story in mind.
Maybe you can hold it forever!
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