PDF 10 Stocks to Buy & Hold Forever

[Pages:14]10 Stocks to Buy & Hold Forever

By Timothy Lutts, Chief Investing Strategist

The goal of this report is not to identify stocks that can give you a decent long-term return, like Johnson & Johnson (JNJ) and DuPont (DD). My goal is to identify stocks that can make you rich!

I want to identify the next (AMZN), the next Apple (AAPL), the next Google (GOOG) and the next Tesla (TSLA)--all stocks that were recommended in our flagship growth advisory, Cabot Growth Investor.

The key attributes I look for in growth stocks are these:

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. A nd 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

Also, I keep in mind the words of Thomas Phelps, who wrote, "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."

In these days where information flows so rapidly that we risk drowning in it, I like Mr. Phelps' reminder that the unknown can be even more important. It reminds me to think long and hard about where a company might be years down the road, when it's far out of sight of the vision of today's analysts.

To collect these stocks, I first went to the Cabot growth analysts, Mike Cintolo and Paul Goodwin, and asked for their top "buy and hold forever" stocks. Then I did my own research and analysis to narrow the list to 10.

Below are the 10 stocks.

1. Autohome (ATHM)

Autohome (ATHM) is a Chinese stock that came public in December 2013, so if you haven't heard of it yet, you're in the majority.

But the company's potential for growth is huge, which is why it passes muster as a stock that could become a huge winner in the long run.

Autohome's vision is simple--and big. Its goal is to become the dominant player in China's online automotive advertising market. And its strategy for achieving that is simply to provide automotive shoppers with everything they want to complete the car-buying experience.

Today, the company's business is centered on two websites, .cn and che168. com. (You can look at these websites and have Google translate them into something resembling English.) Autohome began operations in 2004, and is already the leading online destination for automobile consumers in China.

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But in the future, the sky's the limit because the Chinese automobile market, though still rather young, is already bigger than the U.S. market and has much further to go. Autohome's revenues come mainly from dealers (more than 20,000 use its services), and are generated by three segments: media services (ads and professionally produced editorial content), lead generation services, and an online marketplace (Autohome Mall) where consumers can complete the car-buying experience.

Mobile has obviously been a big focus, too--in the latest quarter, visitors who used the company's primary application rose 29% from the prior year. Additionally, there's rapidly growing content in the Virtual/Augmented Reality area. And going forward, management is excited by the potential of its 2018 strategic expansion, which is code-named "Four Ways to Eat One Fish." Intriguing!

In the latest quarter, revenues were $269 million, exceeding the upper end of the company's guidance, while earnings were $1.00 per share, up 82% from the year before. Earnings have grown at an average rate of 39% over the past four quarters.

ATHM came public at 17 in late 2013, got off to a great start and was at 57 in the middle of 2015. But then the Chinese stock market fell apart (as did most emerging market stocks), eventually driving the stock down to 19 in late 2016--all despite steady increases in sales and earnings. Since then, though, the buyers have been in control, and the stock has been working its way steadily higher, with the longest correction being a 17-week consolidation phase late in 2017.

Thus, Autohome (ATHM) is a good growth stock to buy now. But my focus today is on buying the stock and holding "forever," so I'm more concerned with ATHM's potential over the long haul. Long term, I'm very bullish on both the stock and the company, and I think that buying now will work out very well in the years (hopefully decades) to come.

Note: If you'd like the inside track on other Chinese stocks with great growth potential, I strongly recommend that you take a look at the recommendations in Paul Goodwin's Cabot Emerging Markets Investor. To learn more, click here.

2. Axon Enterprise, Inc. (AAXN)

Axon Enterprise used to be known as Taser, which was one of the market's (and Cabot's) biggest winners of the 2003-2004 bull market. The attraction back then was the company's stun guns (the firm prefers to call them electrical weapons) that enjoyed a spell of growth in police departments. However, growth slowed--revenues actually declined for a while--and the stock fell out of favor for years.

Over the past five years, however, the company has been expanding its offerings. Those stun guns still make up the majority of Axon's revenues--68% in Q4--but growth in that segment is modest (up 10%).

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The reason the stock is strong today has to do with excitement surrounding the firm's new products, and its overall shift to a steadier, higher-margin recurring revenue business model.

Specifically, Axon has a hit on its hands with its cameras (both body-worn and in-car), which are becoming very popular among police departments. About three dozen U.S. cities are using these cameras, and these cities have seen a huge reduction in the number of complaints from citizens as a result.

And those figures are growing! In recent weeks Axon's announced a 240 body camera order for the Reno Police, a 400-camera order from Chicago, a 520 in-car camera order for Milwaukee Police, an order for 1,060 cameras from Virginia Beach, an 1,800 in-car camera order for Montgomery County Police, and a whopping 11,000 cameras from Australia's Victory Police! (There were many other smaller orders, too, that will likely lead to larger sales once the departments see their benefits up close.)

Newer products, and also likely to prove popular, are the firm's Fleet in-car cameras that are connected to the network and mobile apps that sync with cameras and record evidence on a smartphone.

Most attractive of all however, is , which is Axon's cloud-based, digital evidence management platform that allows investigators to easily upload, store, check and share evidence files, saving time and money. Axon licenses this system to users, and at year-end the system's 200,000 users had more than 20 petabytes (equivalent to around six million HD movies on iTunes) on the platform.

Thus, Axon is now offering a complete system for evidence gathering and storing for police departments that brings recurring income to Axon. In the fourth quarter, while the weapons segment grew 10%, the rest of its offerings saw sales rise 27%. All told, the company's future contracted revenue at year-end totaled $536 million, up 8.5% from the prior quarter and much larger than the firm's total revenues of last year ($344 million). All in all, management sees total revenues lifting in the mid-teens this year, while earnings should boom more than 50%, with more growth beyond that.

As for the stock, the chart is about as bullish as you can get. AAXN peaked at 36 back in mid-2015, plunged to 14 during the market's mini-bear market into 2016 and bounced back to 30 later that year. And then it went dead--shares bobbed and weaved between 21 and 30 for more than a year.

But the Q4 report changed all that, with AAXN soaring to 40 after earnings, holding tight during the market's recent plunge and actually pushing to new highs since, leading the market higher. For aggressive growth investors, it's an attractive pattern, and for "forever" investors, it may prove the beginning of a long and profitable relationship.

Note: AAXN was originally recommended by Mike Cintolo in Cabot Growth Investor, and if you'd like more great growth stock ideas, you can find them here.

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3. Zillow (Z)

Zillow is the world's largest online organizer of real estate information, with data on more than 110 million homes in the U.S.

Some of these homes are for sale, some are for rent, and many are listed just for comparison. And the data is free to people like you and me!

What did we do before Zillow?

We bought newspapers, and were limited to reading the tiny print of local listings. Or we picked up free real estate magazines and perused the glossy photos.

But with Zillow, you can look at real estate anywhere in the U.S. You can drill deep, you can scan broadly, and you can investigate mortgage rates--all for free!

Zillow gets its money from real estate agents, who have found over the past decade that if they don't pay Zillow to get their homes shown to house-hunters, they miss out on a lot of valuable leads. And the business, now 14 years old, is still growing fast.

In 2015, Zillow acquired its biggest rival, Trulia, and revenues grew 98% to $645 million. In 2016, they shot ahead another 31% to $847 million. And in 2017 they grew 27%, to $1.08 billion. So growth is not a problem here.

As for earnings, growth has been less consistent, because of investments. But analysts' consensus is that earnings will grow 62% in 2018 and 38% in 2019. So growth is fast and the runway ahead is very long.

But that doesn't mean Zillow is complacent! In fact, last May Zillow introduced a pilot service named Instant Offers in Las Vegas and Orlando. Using Instant Offers, a homeowner looking to sell could get all-cash offers from a hand-selected group of large private investors.

After receiving the offer(s), the homeowner had three choices.

1. Accept an offer and sell directly to an investor 2. Accept an offer and use an agent to manage and close the transaction 3. Reject the offers and list the property on the MLS with an agent.

The results of the first year of testing showed that the vast majority of sellers wound up selling their home with an agent, making Instant Offers an excellent source of seller leads for Premier Agents and brokerage partners.

So earlier this year, Zillow announced not only that it was expanding the program to the Phoenix area, but also that Zillow would join in as a potential buyer (and seller) of homes.

But investors didn't like it--which has created a buying opportunity!

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Zillow came public at 20 in July 2011, and topped 60 in its first week. But six months later it was back down to 21.

In the three years that followed, the stock trended generally higher (sometimes with high volatility), peaking at 57 in July 2014 on news of the possible Trulia merger. But the year that followed wasn't kind to Zillow, as the stock dipped all the way to 16 in early 2016.

Since then, however, the stock has been trending generally higher, pushing to new highs above 65 in early June. It has since retreated to 60, but is still trading well above its 50- and 200-day moving averages. Long term, this looks like an ideal entry point.

Note: Mike Cintolo originally recommended Z in Cabot Top Ten Trader, and if you'd like to get his summaries of 10 hot stocks delivered to your inbox every Monday, you can learn more here.

4. Square (SQ)

Square is a stock that I recommended for my Cabot Stock of the Week readers back in Feb 8, 2017, when it was trading around 14--and just before the release of an excellent earnings report. But I didn't hold it forever; I sold in late November of that year, at 43, as the stock suffered a sharp selloff, and readers who followed my lead took home a profit of 195%.

But if they had held on--here we are seven months later--their profits would be even greater today!

See the chart here.

So let's talk about Square.

The digital payments industry is chockfull of competition, but most of that competition seems focused on big business and money transfers among individuals; that's where firms like MasterCard, Visa and PayPal generally battle. Square, on the other hand, is mostly focused on the needs of small- and mid-sized businesses, a gigantic market that's driving the firm's growth.

Square, of course, was first known for its little square white dongle (great word) that attached to a smartphone or tablet, which, along with the firm's software, effectively turned the device into an electronic cash register, allowing any sort of merchant to easily collect money from any form of credit or debit card. Today Square offers a wide range of software and hardware products, all designed to empower merchants of any size to serve their customers more effectively.

A key to the company's growth (as with Visa and Mastercard) is the volume of payments that it processes from merchants--and from which Square takes a cut. In the first quarter of 2018, gross payment volume was $17.8 billion, up 31% from the year before, and Square's cut of these payments was 2.93% (or $505 million).

But Square is not yet profitable, and that's because the company remains in investment mode, building out an infrastructure so that "omnichannel shoppers"--those who engage through various

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channels (in person, online, in apps) will find the convenience of Square wherever they turn. (On average, omnichannel shoppers spend 3.5 times more than single-channel shoppers.)

Furthermore, just last month Square entered into an agreement to acquire Weebly, a San Franciscobased technology company that provides customers with tools to easily build a professional website or online store--and thus compete with another of Cabot's recommendations, Shopify (SHOP). With full integration of Weebly's web presence tools and Square's in-person and online offerings, sellers of all types, including restaurants, retailers, and service providers, should find it easier to find and engage and serve their customers. (And of course Square will take a piece of the action!)

Of course, this is a dynamic industry, not least because a little company named Amazon recently mentioned that it was developing the capability for its Echo smart speakers (Alexa) to process person-to-person payments on command. Now, person-to-person is not Square's forte, but the announcement did raise the specter of competition if Amazon chose to enter the merchant service business, and did cause more than a little selling.

But the upside of this is that the stock is now roughly 10% off its high--which is sort of normal for stocks in the current market. So if the story intrigues you, do some more research, and consider buying here--and holding forever!

Alternatively, consider getting a new recommendation from me every week in Cabot Stock of the Week, where I show investors how to build a diversified portfolio, how to let winners run, and how to cut losses short.

5. SiteOne Landscape Supply (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.

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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 just completed a big postearnings run-up from 73 to new all-time highs above 94, though it has since pulled back to 87. That could just the dip you need for a decent entry point. Then just hold on, keeping the Home Depot story in mind.

Maybe you can hold it forever!

6. 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.

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