Jubak: 10 Stocks for 10 Years
10/31/2003 12:00 am EST
From acting as moderator of the Future
of Technology Investing panel, to presenting his own in-depth workshops on
stockpicking, Jim Jubak stood out as among the most popular
market seers at the latest Money Show. Here, the senior markets editor for
CNBC on MSN Money, highlights his top 10 stock picks
for the next 10 years.
"I’m going to give you my 10 stocks for the next 10 years. And I’m going to do it by standing the usual method for making long-term picks on its head. Let’s be honest: Most attempts to pick long-term winners begin with a big opportunity and then look for companies with products poised to exploit that trend. Hogwash. That can work reasonably well if you’re investing for, say, the next year or two. But over a decade, a company’s current product portfolio is far less important to the long-term appreciation of its stock than the internal strengths and weaknesses of the company.
"The success stories of Dell and Wal-Mart are not built around a product innovation radically superior to those of competitors. In each case, the success hinged on the company’s ability to build an internal system that created a lasting competitive advantage over others in its industry. Dell’s computers, for example, sell so well because they are built from commodity parts. That allows the company to create machines to individual customer orders and ship them out the door with minimal overhead and at low prices. Wal-Mart’s stores don’t succeed because of better design or superior product offerings. Instead, the secret is the company’s quick-response inventory system that tells managers immediately what sells and allows them to constantly drive prices lower.
"To look for stocks for the next 10 years that might perform as well as Dell and Wal-Mart have over the last 10, start with an opportunity trend that’s big enough to last a decade. But don’t stop there, and certainly don’t concentrate on the hot product of the moment. Instead, look for companies that have built internal structures capable of exploiting those opportunities as they shift character and direction over the next decade. Let me give you some opportunity trend examples in three areas and the names of some companies built to exploit them.
"The two big trends here to watch are: increasing systems complexity and declining prices for technology products. Complexity plays out like this: Increasingly intricate technology systems have customers--who purchased expensive systems from various vendors in the past decade only to discover the technology incompatible--demanding single-source solutions. At the same time, as ever more complex technology systems are performing more and more tasks, the price of technology products continues to drop. With capital readily available and cheap for building new technology factories in Asia and elsewhere, component prices will continue to fall. And as more and more of these new component suppliers move up the food chain, they will put ever-increasing pressure on the prices of finished technology products. Who win in this technology race:
Cisco Systems (CSCO NASDAQ). The networking giant is on the verge of becoming the dominant one-stop shop for a big hunk of the telecommunications industry.
Intel (INTC NASDAQ). The chip company is one of the few technology companies built around manufacturing systems that drive down costs every year.
"Others to watch in this space: EMC (EMC NYSE), which has made acquisitions in an effort to become the one-stop data processing and storage system company; Samsung Electronics (SSNLF NASDAQ), which is putting some of Intel’s tricks to work against the chip leader; and Xilinx (XLNX NASDAQ), which is in the business of selling chips that help its customers drive down costs while increasing the complexity of their products.
Trend: The Rise of China and India
" The developed countries of Europe, Japan, and the United States won’t drive global economic growth in the next decade. China and India (and, potentially, other nearby Asian countries such as Vietnam) will. Making a buck in those rapidly expanding economies won’t be easy, however, because both countries are skilled at quickly developing local products that compete with, at lower prices, successful imported products. So the key here isn’t so much product--which can be easily duplicated--but dominance in marketing that comes from a superior distribution system and product cache that can’t easily be matched by local producers. Who wins?
American International Group (AIG NYSE). The financial services company sells financial products to the rising Asian middle class that is attracted by the Western reputation for superior service and returns.
- Avon Products (AVP NYSE). The company has expanded its Avon Lady distribution system into China, giving it "shelf space" that no competitor can match.
- Rio Tinto (RTP NYSE). The global mining company supplies raw materials, most significantly iron, to those economies from relatively nearby source.
Trend: Cutting the Cost of Aging in the Developed World
Thanks to falling birth rates that are adding fewer children to the population and improved life expectancies, the population in countries such as Japan, Italy, and Germany is rapidly getting older. The US, with its more liberal immigration policies, is aging as well, if not as rapidly. An older population is a huge consumer of medical products and services. Their growing numbers will lead to an increase in demand for drug therapies, nursing care, and surgical implants that address some of the medical problems that can come with aging. But these companies are likely to face a cost squeeze because no one has yet figured out how these aging societies will pay for these higher costs. So the winners will be companies that can supply medical products at the lowest cost or that offer therapies and services that prevent disease or otherwise lower the cost of aging. Who wins?
Pfizer (PFE NYSE). Thanks to its huge sales force, the pharmaceutical company is in a position to get a larger share of the drug dollar as companies with hot new drugs decide to let Pfizer sell them.
- Teva Pharmaceutical Industries (TEVA NASDAQ). As the low-cost producer of generic drugs, it will continue to ride the trend toward generics.
"Companies to watch in this space: NPS Pharmaceuticals (NPSP NASDAQ), which has an interesting osteoporosis drug in development.
Trend: The Rising Cost of
It looks like we’re headed toward a decade where capital costs more and at the same time the creditworthiness of most potential borrowers declines. Lots of smaller trends feed into this mega-trend. An aging world, for example, is likely to consume more of the supply of savings. Most of the industrial world is now running with structural budget deficits and the central banks of the exporting countries have been printing money in an effort to keep their own currencies cheap. All this should push up interest rates around the world over the next 10 years. Winners will be companies that can raise capital at the lowest cost, thanks to their own creditworthiness and ability to generate cash internally, and that can then manage to invest that cash at higher rates. Who wins?
- Berkshire Hathaway (BRK.B NYSE). Warren Buffett’s holding company has a rock-solid credit rating and generates a river of cash internally. As a result, its cost of funds to finance new investments is close to zero.
- Exxon Mobil (XOM NYSE) and BP (BP NYSE). These energy giants will be able to invest their huge cash flows in new energy properties at high rates of return.
"That’s my list of 10 for the next 10 years--plus
a few to watch as trends develop. They’re certainly not the only stocks you can buy
to take advantage of these trends, but they do have the internal structures that
a company needs to exploit any of these opportunities. Instead of being exhaustive, I hope
this list and this method stimulate your own thinking about long-term investments. The
contrarian in me suggests that this is the right time to be working on the
long-term core of a portfolio rather than chasing overpriced stocks.
"Of course, none of the stocks I’ve mentioned is cheap. In fact, most of them are fully priced. If you’re looking for short-term momentum plays or big quick gains, look elsewhere. But let’s keep in mind that long-term investing is a solid strategy, if you pick the right stocks, because you make time and compounding work for you. The companies I’ve named are able to reinvest their cash flows over and over again at a rate of return well above that paid by a CD. It’s that compounding at a high rate of return that you’re buying. I suggest using dollar cost averaging to build a position in any of these stocks."