(15 US stocks to buy) Recently, we compiled a list of ASX stocks that you could buy and hold indefinitely. Here’s a second list of US stocks you might buy indefinitely, which includes both well-known firms like Microsoft and lesser-known treasures.
The post was inspired by Warren Buffett’s shareholder letter this year, in which he mentioned Occidental Petroleum and five huge Japanese corporations – Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo – as companies Berkshire Hathaway expects to own permanently.
Buffett emphasized the importance of sticking with a successful firm in his letter. Patience pays off, and one great business can outweigh the numerous terrible decisions that are unavoidable.
Given that more of our readers want to invest abroad, I felt it would be interesting writing a follow-up piece on US stocks that you might potentially buy and own permanently.
The criteria
The U.S. market is vast. The ASX has over 2,200 listed firms, comparable to the New York Stock Exchange (NYSE). However, there are nearly 4,000 firms listed on the NASDAQ, even though equities are listed on both the NYSE and the NASDAQ.
The increased number of companies listed in the United States creates both benefits and disadvantages. The opportunities are that there are so many stocks to pick from, and they frequently operate in vast, appealing markets, not just in the United States, but also abroad. The challenges involve sorting through the stocks to choose the best ones to keep forever.
The screening process is not simple. First, you must be completely convinced that a company will last a long time, if not indefinitely. That is no simple undertaking, given that the average S&P 500 firm has a lifespan of about 20 years. Second, you want companies that not only endure the test of time, but also deliver returns that are comparable to or greater than the indices. If they can’t do that, there’s little use in possessing them.
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Here are the criteria we’ve developed to identify the best US equities to buy and hold perpetually:
In the S&P 500, ideally, you want to own well-established businesses that have a track record of success. Interestingly, the S&P 500 presently contains 503 equities, as numerous corporations have two share classes. The smallest weight in the index belongs to one of our own, News Corporation Class B shares, which have a market valuation of $14.2 billion. That type of market capitalization is considerable in Australia, but less so in the United States.
A long runway of expansion potential. This is critical. It entails excluding numerous enterprises that operate in established industries and/or limited locations. It also excludes firms with short-lived assets. Consider minerals and energy corporations with mines and oilfields that have finite lifespan. Alternatively, pharmaceutical businesses that rely on a small number of medications whose patents or exclusivity periods have expired. This criterion favors companies with global operations and significant unexplored prospects.
Economic moats. Moats are sustainable competitive advantages. They assist enterprises in defying capitalism’s laws, which state that businesses with high capital returns will be compelled to compete. Competitive advantages can arise from a variety of sources, including network effects, intangible assets, cost advantages, switching costs, and efficient scale. You may learn more about moats here.
Good capital returns. A corporation with high capital returns is typically considered to be of high quality. Simply explained, return on capital is the profit that a firm makes from the equity and debt invested in the business.
Solid balance sheets. Excessive debt makes businesses vulnerable. You want to own companies that do not rely on excessive debt to make profits.
We don’t need extraordinary management. Having good managers really helps. However, if you intend to buy a stock for a long time, you cannot rely on one or two managers to succeed. The firm must be so good that it does not require an extraordinary CEO. To put it another way, the business must be so good that a lousy management will have a difficult time messing things up.
Disruption resistant. This overlaps with criterion 2 and 3, yet it is worth including. When you buy a firm for the long term, you are basically wagering on factors that will not change. This is especially crucial given the rise of AI and other technologies.
The “buy and hold forever” list. Let’s go through the companies, one-by-one:
Altria (NYSE:MO)
Nothing like an explosive tobacco stock to start the list. Many investors will be surprised to learn that the tobacco industry has been the best-performing sector in the United States over the last century. How is this possible, considering the reduction in the number of smokers and the ongoing increase in taxes on tobacco companies? These taxes, combined with prohibitions on tobacco promotion, have created significant hurdles to entrance for competitors. Combined with industry concentration, it has resulted in enormous and long-term price power for the remaining firms. Altria is the leading tobacco business in the United States.
CME Group (NYSE:CME)
Stock exchanges are fantastic enterprises because they essentially serve as platforms for transactions and allow investors to participate in the action without requiring significant capital commitment, financial leverage, or operating risk. CME owns the leading markets for interest rate and WTI oil futures. The low volatility of the previous 15 years has not benefited CME, but this is beginning to change and should create a tailwind in the coming decade.
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Automatic Data Processing (NYSE: ADP)
Many of you have encountered ADP through the payroll and human resource tools that it offers to businesses. These items are vital to their customers, and they become integrated into business operations. ADP’s moat is built on this ‘stickiness’ with customers. Increasing regulatory complexity, as well as the emergence of hybrid work, should aid to boost growth over time.
CSX Corporation (NYSE: CSX)
Railroads in the United States are smart companies. Rail is the only viable mode of transportation for heavy grains, commodities, steel, and anything else that requires a large capacity to be moved over long distances. This implies that firms like CSX have a captive audience. With a highly integrated business, railroad corporations have little trouble raising prices and reaping good profits. Four businesses, including CSX, control nearly the entire industry in the United States.
Deere & Co (NYSE:DE)
Deere is the market leader in agricultural machinery and one of the top manufacturers in construction machinery. Farmers have relied on tractors and other equipment for over 150 years. The agriculture industry is cyclical, but its suppliers are less so. The building arm will also benefit from the $1.2 trillion infrastructure project in the United States.
Coca-Cola (NYSE:KO)
Coca-Cola has experienced an evolution over the last 10 years, transitioning to a completely franchised, capital-light firm that has increased its moat and provides opportunities for future growth. They continue to be the global leader in soft drinks, and the future looks promising with constant volume growth, pricing power, and lower costs due to improved management.
Fair Isaac Corporation (NYSE:FICO)
Fair Isaac is the industry leader in credit scoring. These scores are important in the United States because they serve as benchmarks for investors, lenders, and other stakeholders. Their prevalence makes them nearly impossible to remove. Fair Isaac only began boosting rates in earnest approximately five years ago, and it should be able to continue doing so for many years while providing outstanding returns to stockholders.
Intercontinental Exchange (NYSE:ICE)
With CME, I explained why stock exchanges are excellent businesses. The New York Stock Exchange, the granddaddy of exchanges, is owned by the Intercontinental Exchange. It is also the leading futures market for global energy contracts. Finally, the corporation has been developing a mortgage data business, which appears promising.
Lockheed Martin (NYSE:LMT)
History suggests that the relative world peace of the last 30 years is unlikely to last another 30. It would also imply that the United States will have to defend its worldwide dominance against challengers. If this is correct, the handful of trustworthy defense companies used by the US government stand to benefit significantly. Lockheed Martin is among the largest of these contractors. The finest part is that even if peace prevails, the company should continue to produce excellent results.
Microsoft (NASDAQ:MSFT)
The largest company on the S&P 500 is also among the best. Microsoft Office is a money-making machine that is useful for both businesses and people. The company also owns LinkedIn, the leading online recruitment site. Microsoft also has a rapidly developing cloud segment with Azure. Finally, it is a leader in artificial intelligence. The organization now has a suite of outstanding, mission-critical businesses with huge runways for expansion.
Mastercard (NYSE:MA)
MasterCard and Visa dominate electronic payments. Amazingly, global digital payments barely overtook cash payments a few years ago, and the continuous shift to digital should ensure long-term development. Furthermore, these businesses profit from a phenomenon known as the network effect, which states that the more consumers that connect to a payment network, the more appealing that payment network becomes to merchants, making the network more convenient for customers. This has enabled Mastercard to report net profit margins close to 45% and returns on equity of 169%!
Moody’s Corp (NYSE:MCO)
Moody’s is the leading credit rating agency for bonds. These evaluations are critical to capital market participants, index providers, and regulators. Moody’s and S&P Global control the industry, resulting in pricing power that, when combined with capital-light firms, has resulted in spectacular long-term returns on capital.
Norfolk Southern (NYSE:NSC)
With CSX, we explained why US railroads are among my favorite enterprises. Norfolk Southern is one of four corporations with a combined 90% market share. Price rises and expense control should bring in high single-digit earnings growth for Norfolk Southern over the next 10-20 years.
Northrop Grumman (NYSE:NOC)
We discussed with Lockheed Martin why defense industries in the United States have a long, bright future. Northrop is another defense contractor, but its primary focus is on developing hardware for classified programs. The US government relies on trustworthy partners like Northrop to meet its military needs, which keeps potential competitors at a distance.
NVR Inc (NYSE:NVR)
Including a homebuilder here may appear unusual. After all, homebuilding is notoriously prone to economic and housing downturns, and it often demands a significant investment. However, NVR changed the market with an investment-light model that optioned property for development, and while competitors are attempting to replicate the company’s concept, they have yet to catch up. NVR has delivered some of the finest returns of any US stock over the last 30 years, and I believe it will continue to perform well in the future.
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What wasn’t on the list
Often, there are more disputes about what does not belong on a list than what does. Let’s look at some of the companies that didn’t make the cut:
Six of the Magnificent Seven. Microsoft is the only one of the Magnificent 7 to make the list. Tesla did not because it is facing increased competition in EVs and has a little moat to defend itself from that threat. Apple‘s sales have been flat for quite some time, indicating that the corporation is maturing. Nvidia will confront stiff competition in the semiconductor industry, and its sheer size will make long-term growth difficult.
Meta has Facebook, which is a dying program (ask anyone under 16 whether they use it, and you’ll get funny stares), and it relies on investments in AI and the Metaverse to drive future growth. Alphabet’s search dominance is under threat from AI, and it hasn’t done enough to mitigate the threat. Finally, Amazon is primarily relying on cloud services because its retail business is not profitable, and I am unsure what the cloud market will look like in five years, let alone 50 years.
Banks. No banks made the list. Investment banks have narrow moats, are cyclical, and have historically produced mediocre returns. Retail banks in the United States, unlike Australia, operate in a very competitive environment, making decent profits difficult to come by. I considered Bank of America, the largest retail bank, for the list, but it did not measure up to the other finalists.
Pharmaceutical companies. Eli Lilly and Novo Nordisk have recently been remarkable market performers, while many other pharmaceutical businesses have achieved excellent long-term returns. Why did none of them make the list? Branded pharmaceuticals have a limited exclusivity period before generic competition can join the market. These corporations then rely on future medication investments to drive revenue growth. The problem is that it’s tough to predict which medications will become the next big thing. As a result, forecasting long-term earnings growth for pharmaceutical businesses becomes nearly impossible.
Mining and energy companies. Mining and energy are cyclical and capital expensive industries, resulting in consistently low long-term returns.
Property. Real estate is capital-intensive, cyclical, and frequently relies on equity markets to fund expansion. Infrastructure firms are more attractive since they are less cyclical and have significant tailwinds from the US Inflation Reduction Act, but there are few moats among stocks in this category.
A final word
It’s worth emphasizing that this isn’t a “buy now, hold forever” list. Instead, it is intended to be a wish list of stocks to purchase in the future when the price is appropriate. In other words, I didn’t consider valuations when producing this list.
The list also does not account for your personal financial demands. As always, seek financial advice if necessary.
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