Bow Tie Nation! Joseph Hogue here with the Let’s Talk Money channel and Nation, it has been a crazy year for the market…maybe the craziest ever. First came the fastest stock market crash in history, with the S&P plunging 34% in just 23 trading days. Then came the fastest rebound in history, taking the market back up to its peak in less than five months!
And while the market made a new high in August, a lot of investors panicked on the way down and didn’t benefit from the rebound.
Nation we love talking stock picks and strategies here on the channel but sometimes, the best investing strategy is that simple, good ol’ buy and hold. Just buying shares of good quality companies you can hold forever and not worry about what the market is doing.
In fact, even after two decades as an analyst and as much as I love picking stocks to buy, a big part of my own portfolio is made up of those forever stocks that I’ll hold until the day I die!
So for this video, I wanted to help you take the stress out of investing, help you find those forever stocks to buy and hold. I’ll show you what to look for in stocks you can keep forever, how to use it in a stock screener, and then reveal five forever stocks I’ve got in my portfolio.
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How to Screen for Buy and Hold Stocks
So let’s jump right into the Stockcard screener here if you click through, you'll see the screen I'm using to filter stocks. Besides as a tool to filter for stocks to buy, I love how the platform makes stock analysis easy by grouping the financial ratios into categories like operations, returns and valuation.
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But if we click over here on Filters, we can set up and save stock screeners that will continuously run and give us updated results to research. I’ll start a new screen and call it Forever Stocks here and you can see the platform makes it really easy to filter with some unique categories.
In fact, one category you might want to check out is this Investor’s Strategy here. This is where investors have explicitly told Stockcard they’re holding a stock for a strategy like buy and hold, dividends or speculation so it’s a great start if you’re looking for investments that fit one of those.
If we toggle the box and click apply filter, we see there are 614 stocks held in buy and hold portfolios among investors using the platform.
But I want to narrow the list down a little more so I’m going to edit the filter. We’ll toggle these two boxes for large- and mid-cap stocks. I’m going to click off the strategy box to screen across a broader group. I’ll also screen for good dividend-paying stocks, undervalued stocks and companies with good sales growth and click apply.
And here we’ve narrowed it down to 34 companies we can research further to pick the top five stocks to buy and hold forever.
How to Pick the Best Buy and Hold Stocks
Now I’ll highlight those five stocks to buy next but I want to go through those filters I used to show you what I’m looking for in these buy-and-hold stocks. The idea here is going to be to show you how to put your own screener together or adjust the one I used.
First is I’m looking for large- and mid-cap stocks and we’re talking about company size, usually companies with a market cap of $1.5 billion or more here. All you in the Nation know, I love those smaller penny stocks and growth companies but this isn’t where I’m buying them. This is a set-it and forget-it portfolio so I want companies that dominate their market through size and scale and will be around no matter what.
Dividends! What’s the use of holding a stock forever if you never make any money off it? So yeah, I’m not saying capital gains aren’t a legit return on stocks but I want to get paid while I invest, especially in these stocks I never plan on selling.
I usually look for stocks with at least a 2% dividend yield which is around the market average but will break the rule occasionally for a great stock with other positives.
I’ll usually look for companies with some value in the shares as well, maybe trading for a PE ratio that’s below the sector average.
Now since I’m planning on holding these forever, this one isn’t quite as important as you might think and it’s usually the first to get dumped if I need to expand my list to find more potential stock picks.
A cheaper price is nice but you’re really looking for stocks that are going to have much higher prices per share over 20- or 30-years so I’m not going to rule out a great long-term investment just because it’s a little expensive right now.
I’ll also look for companies with sales growth that’s above the sector average or at least 10% annually. Here again, I’ll sometimes overlook one or two years of weaker growth if a company has a strong competitive advantage and some of these other fundamentals.
Don’t totally ignore sales growth though because a lot of times, this is going to point to the competitive advantages the company has over peers. If a company is able to book sales growth above the industry average or positive growth in a weak market, that might be a clue to it’s real power over competitors.
Finally here before I reveal those five stocks, I’ll look for companies with a competitive and lasting advantage over peers.
This is more subjective but definitely one you shouldn’t neglect. Does the company’s product do something no competitor can? Does it have advantages like is it difficult for customers to switch once they start using the product? Is the brand super recognizable or known for something?
A couple of ways to look for this, you can look to see how much market share the company has in a product. For example, if it controls much more of the market sales than any other competitors, it could be a clue that the product is so much better than others. You can also compare the amount the company spends on marketing versus how much it books in sales, this can be found on the income statement, and basically you’re looking for companies that spend less in marketing or other line items but book more in sales. Maybe their brand or advantage is so strong they don’t have to spend as much to book those sales. Maybe the company is so well run that administration costs are lower than peers.
Forever Stocks I'm Buying Now
So with these five buy-and-hold stocks, I used the screener above and picked out five that I own in my portfolio. Five stocks you can start with that will give you a diversified list with some of the best names in five sectors of the economy.
Lockheed Martin, ticker LMT, is first on our list of buy-and-hold stocks with its locked-in cash flows and 2.7% dividend yield.
Lockheed is one of my favorites for stable cash flows since the pandemic really doesn’t affect defense spending and its one of the few areas on Capitol Hill with bipartisan support. About 30% of the company’s revenue comes from its F-35 contract which extends through 2070, so decades of cash flow to drive the shares.
Even on a change in Washington, I think the rise of China and the belligerence of Russia means defense spending is going to be fairly safe for the foreseeable future. There are only a limited number of these big defense contractors so it’s really an oligopoly-type market.
Sales great at an 11% pace last year and are set to rise 8% this year which helped the company beat earnings expectations in the first and second quarter. The company has grown the dividend by a 10.4% annualized pace over the last five years and the fact that it’s still only paying out 41% of profits to cover the dividend, there’s plenty of room to keep growing the payment.
Shares of Lockheed are trading for 16.5-times trailing earnings which is slightly higher than competitors like Raytheon and General Dynamics but I like the cash flows better with LMT. Analysts have an average price target of $444 per share which is about 18% above the current price.
Stocks in the financials sector have been slammed this year, making it a great time to pick up long-term exposure, and JP Morgan, ticker JPM, is probably the best bank around.
I like JP Morgan here because it’s got enough capital market business to support earnings and growth against the interest rate environment. Basically, because interest rates are so low, it’s really hard for lending banks to make money. Banks with most of their business in mortgages and lending just aren’t making much on those 15- and 30-year rates.
JP Morgan though books a lot of its revenue from trading fees and other market transactions like investment banking. It’s also the largest credit card issuer in the U.S. and has a strong capital cushion just in case loan defaults creep up.
Basically, JPM is the bank you want to own when banks aren’t doing very well but you want to be ready for the rebound.
Revenue is expected flat this year but has grown by a 6% annual pace over the last three years and actually surprised on the upside last quarter. The bank has grown its dividend by an amazing 21% annual pace over the last three years though it’s likely to stay at $0.90 a quarter this year. Still, that’s a 3.6% dividend yield on a stock with a lot of value waiting for investors.
I like using the price-to-book multiple for banks, it’s more appropriate as a valuation measure than earnings, so it gives you a more accurate metric to compare against other banks. JPM here is trading at 1.3-times its book value, which is about a 28% discount to where it traded at last December, though a little more expensive than competitors like Wells Fargo and Bank of America. The average analyst estimate is for $113 per share which is about 15% above the current price.
For our consumer staples pick, I wanted to go with Constellation Brands, ticker STZ, for its cash flow on traditional products and growth potential in cannabis.
Constellation is the largest alcohol supplier in the U.S. with product categories from beer to wine and liquor. The company was able to take advantage of AB InBev’s antitrust problems to lock in a perpetual ownership of its Mexican beer brands in the U.S., great brands like Corona and Modelo. It’s in the process of divesting some of the lower margin wine brands this year and I think we’ll see a much more profitable company going into next year.
Revenue has actually been a weak point over the last year with sales up just 2.7% last year and expected down by about that same amount this year. Longer-term though, sales growth should return to mid-single digits annually which is higher than competitors. Constellation is the undisputed leader in the premium beers space in the U.S. with about 25% of the market versus 23% for AB InBev and 11% for Heineken.
What I really like about the company though is the moonshot optionality of its cannabis investment. Constellation’s 37% ownership of Canopy Growth gives the stock that option-like upside if marijuana stocks take off again but you also get the certainty in the largest alcohol supplier in the United States.
Shares pay a 1.6% dividend yield and its grown that payment by 23% annually over the last three years. I was actually a little surprised at the valuation on this one, trading for nearly 20-times on a price-to-earnings basis but the average analyst estimate of $285 per share is over 58% above the current price, so definitely some long-term value here.
Those of you in the Nation have heard me talk about this next one, CVS Health, ticker CVS, and its 3.4% dividend yield.
CVS has got a lock on healthcare delivery in the U.S. with insurance, distribution and retail pharmacy. In the near-term, I think the shares get a surprise upside on distribution of the COVID vaccine. Long-term, that upside to controlling the healthcare delivery market is undeniable.
Sales growth this year has been disappointing at just 4% but the company has booked a 13% annualized rate over the last three years. Looking further out, the company should be able to maintain a 10% annual increase or higher.
The dividend has only grown at about 6% annually over the last three years but the company is now only paying out 32% of profits to cover the dividend so there’s lots of room for growth here, especially if cash flow improves on the vaccine distribution.
I think CVS is incredibly cheap here at a PE ratio of less than 10-times earnings. Analysts have an average target of $86 a share which is an astounding 48% above the current price, so even if that plays out over three to five years, a very solid return.
One of my favorite buy-and-hold tech stocks here is Cisco Systems, ticker CSCO, and its 3.7% dividend yield.
Cisco had a disappointing second quarter report with the stock plunging 12% in August but it could be a great opportunity to pick up shares of a tech titan and a huge yield.
The outlook for enterprise spending is pretty week, especially as companies switch to an at-home workforce, but Cisco is making up for it on its security and subscriptions business. Management is also launching a cost-saving program that could shave as much as a billion off costs. Even as tech and the networking space shifts, Cisco is still a dominant force in most of its product segments; switches and routers, cybersecurity and networking so I don’t see the most recent quarter as an existential threat.
The company also has a strong position in cloud and enterprise services but what I’m really excited about is the May acquisition of ThousandEyes, a networking intelligence company. This could really boost Cisco’s cloud services line, basically it’s providing data intelligence on applications and online services to companies which is going to be a major trend for years.
Sales growth has been surprisingly weak over the last couple of years but the outlook is much better and I don’t think it’s factored into the shares yet. Despite sluggish sales, the company has been able to grow the revenue by 9% annually and is one of those rare tech stocks with a 3%-plus yield.
Versus a tech sector that trades for 30-times or more on a PE basis, shares of Cisco at 14-times earnings look like a steal and the analyst community agrees with me on this one. The average price target of $84.62 per share is more than double the current price of the shares.
Sign up on Stockcard for free and make stock-picking easy with the research tool I use! Use promo code: bowtienation for an exclusive discount!
Investing in buy-and-hold stocks is a great way to take the stress out of investing and make some great long-term returns. Finding forever stocks is as easy as investing in a few companies that can do well over 20- or 30-years and just riding the wave!