By Timothy Lutts
As to the market, which is very good about following the rules of supply and demand, these are very interesting times. Demand is down, in part because of lousy economic news (which I’m not going to go into today). Bond yields are at record lows … a clear sign of the market’s “flight to safety.” And it’s extremely difficult to find an optimistic economist these days. (You know in your heart that they’re often wrong, but you listen to them anyway.)
Ben Bernanke commented a month ago that “the economic outlook remains unusually uncertain,” and the President of Cisco (CSCO), John Chambers, repeated that outlook after his company’s earnings report last week, saying, “We think the words “unusual uncertainty” are an accurate description of what’s occurring.”
The market, of course, hates uncertainty, but I’ve learned to embrace it, which is why I’ve been growing increasingly optimistic in recent weeks, particularly because the market hasn’t fallen apart. So today, I want to give you part two of my article on “Stocks to Hold Forever.”
Part one, back on July 28, told you about the amazing Mr. Phelps, whose investment strategy was to buy stocks with exceptional growth potential when they were young … and never sell them.
Qualities he looked for included:
- Revolutionary technologies or services
- New and cheaper sources of energy
- Small size, so it can grow fast
- Undiscovered by the masses
- Barriers to entry
- Superior profit margins.
And he didn’t minimize the value of buying when stocks are temporarily depressed … as they were in 1932 and, more recently, in 2002 and 2008.
Three years ago, I got together with the other Cabot editors and came up with a list of 10 stocks. On July 7, 2007, I published this list. And three weeks ago I reviewed the results … which were very good. In those three years, the S&P 500 lost 24%. But our 10 stocks had an average positive return of 39.5%.
So I got together with Cabot’s growth editors again, and we came up with a new list of nine stocks — we couldn’t agree on ten. Two are repeats from the 2007 list — and here they are:
- American Superconductor (AMSC) is a leading provider of the electronics that power wind power systems, where it presents substantial barriers to entry and growth potential is enormous. The company has grown revenues every year of the past decade, its profit margins top 10% and it’s still relatively undiscovered.
- Chipotle Mexican Grill (CMG) has the potential to be the McDonald’s (MCD) of the next half-century … in part because this high-quality burrito shop was spun off from McDonald’s in 2006 … so management has been taught well. Revenues are growing steadily and profit margins are consistently in the high single digits, which is great in the restaurant industry. (It’s my son’s favorite restaurant, but I’m not the analyst who submitted it.)
- Ctrip (CTRP) is the leading online travel agent in China, where a growing middle class and increased business activity mean the travel industry is booming. Last year, the recession slowed revenue growth at Ctrip to 35%; in the latest quarter, it was back up to 47% … and profit margins were a very healthy 42.2%. Ctrip was on the list three years ago.
- First Solar (FSLR) is a leading manufacturer of solar power modules, boasting great growth of both revenues and earnings … and profit margins of 27% in the latest quarter, very impressive for a manufacturer. The stock was a big winner for Cabot Market Letter in 2006 (we sold in March 2007) and like most stocks in the industry it’s spent the time since then cooling off. I think it’s cool enough now. First Solar was on the list three years ago, too.
- Green Mountain Coffee Roasters (GMCR) makes the revolutionary single-serving Keurig coffee brewers, and gets a royalty for every cup of coffee that’s brewed in them, which is a great source of recurring income. Barriers to entry are high. The market is global. Revenues have grown every year of the past decade. And profit margins are healthy at over 8%.
- Home Inns & Hotels Management (HMIN) is the largest hotel chain in China. Growth is as easy as opening new hotels … the cookie-cutter growth model. The company has no debt, unlike most hotel chains, and profit margins were 19.6% in the latest quarter.
- MercadoLibre (MELI), located in Argentina, is the eBay of South and Central America — in fact, eBay (EBAY) owns 18% of the company. Most sellers are businesses. Growth is virtually assured. The barrier to entry is very high. And profit margins are over 20%. MercadoLibre is the smallest company of these 9, as measured by revenues.
- STR Holdings (STRI) makes the precisely engineered plastic film encapsulants used by most solar module manufacturers to protect their components from water, wind, radiation and shock. Profit margins are 19%. The stock came public just last year, so it’s not well known — in fact, it’s the most lightly traded of these 9 stocks. But as the solar power industry grows, STRI should grow with it. Coming off a slow 2009, revenues mushroomed 62% in the latest quarter.
- VMware (VMW) makes software that enables virtualization and cloud computing. It’s grown revenues every year of the past decade, and could well evolve into the Microsoft (MSFT) of the next decade. In the latest quarter, revenues grew 48% while profit margins hit 21%.
Disclosure: No positions