2 Big-Time, Long-Term Plays

07/10/2012 11:00 am EST


Michael Tian

Senior Equity Analyst and Equities Strategist, Morningstar Opportunistic Investor

These two stocks are riding long-term trends that will become undeniably strong in the near future, says Michael Tian of Morningstar.

The two best stocks to buy now. We’re here with Mike Tian, who is going to tell us his favorite two stocks right now.

The first company I want to talk about today is Charles Schwab (SCHW), obviously this country’s largest discount broker.

A couple of things driving this company are on the negative side you have very low interest rates. Charles Schwab makes a lot of money from essentially the float in customer’s accounts, which is not being used right now, and also from money market funds, and they’re having to waive all these fees because interest rates are so low. So that has pushed the stock down to a very low level.

However, that doesn’t mean the company’s economic moat isn’t strengthening, and that’s happening in a couple of ways. No. 1, they’re a phenomenal asset gatherer. They’ve gathered about $80 billion of assets every year for the last decade. So that obviously breeds all sorts of scale advantages, because your cost doesn’t go up with the same rate as your assets go up. So that’s No. 1.

No. 2 is that they’re getting into a couple of different areas to make their customers more sticky—for example, online banking. So if you have all your financial information kind of linked together to your Charles Schwab account, you are less likely to switch.

Also, financial advisory. When you’re getting advisory and asset allocation for some other medium to more wealthy clients, that makes the relationship more sticky, so breeding switching costs, which is another very important competitor advantage.

In the long run, they want to get into things like 401(k) asset management. So if they succeed at that, that is probably the most sticky client relationship of all. Can you imagine if you’re a large company and have all your 401(k) custodied at Schwab? There are a lot of regulatory barriers and just a massive hassle to switch.

Right, and then you have all this long-term money there, too.

Exactly, exactly. So once interest rates go up, I think all these competitive advantages will become very, very apparent to the stock market. I'm very bullish on this company for the long run.

Well, that’s No. 1. What’s No. 2?

No. 2 is a small company this time: Cloud Peak Energy (CLD). About $1 billion in market cap. Most people haven’t heard of this company because they’re actually a coal miner, which is not a very popular sector right now, as you can imagine.

Right...not a sexy part of the business cycle.

Exactly, so the EPA is kind of after coal companies in general, and also low natural gas prices have really beaten down the stock. It’s only trading for about seven or eight times forward earnings.

And the long run is competitive advantages are increasing, because its costs are a lot better than virtually all of its competitors. This is a geological thing, so it’s nature endowed—it’s hard to take away.

They’re one of the largest miners in this place called the Potter River Basin, which has gigantic coal seams. We’re talking 50 to 100 feet, very close to the surface. It’s easy and low cost to mine. More importantly, going forward their cost inflation is going to be a lot slower than other coal miners, such as the people who are operating in the Appalachians or even foreign companies in China, India, or Australia, which has experienced huge cost inflations. So that’s cost advantage that should be rolling over time.

Also, there is a very, very big long-term export potential that people are kind of forgetting about in the last couple of years, really. Asian coal prices, because of robust demand from China and India, have grown a lot, so that for the first time ever really it was profitable to export coal directly from the Potter River Basin to the Pacific Region, so to speak. Those export volumes are three to four times as profitable as selling to domestic utilities.

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