One of my favorite posts in memory was a MarketWatch article from last year that discussed the 10 best stocks of the past 20 years. No. 1 on the list was a railroad — Kansas City Southern (KSU) — whose stock achieved a cumulative total return of 19,030% between March 1992 and March 2012.
All told, the 10 stocks performed almost 26 times better over those two decades than the S&P 500.
Naturally, that got me thinking about the best stocks for the next 20 years.
Considering MarketWatch selected stocks included in the Russell 3000, I’ll play ball and do the same. However, instead of playing the field, I’ll pick two small-cap stocks, two midcaps and one large-cap company. I especially like the midcaps because they tend to be the best and most consistent performers over the long term.
Without further ado, here are my five best stocks for the next 20 years:
Best Stocks #1 (Small Cap): Echo Global Logistics (ECHO)
Echo Global Logistics (ECHO) uses web-based proprietary technology to provide business process outsourcing to the transportation industry. Founded in 2005, ECHO serves more than 28,500 small- and midsize customers who use its technology to access the best shipping prices from a network of 24,000 carriers in a matter of seconds.
This innovation has helped grow revenues 71% compounded annually from $7.3 million in Echo’s first year of operation to $874 million in the trailing 12 months.
In its third-quarter report, Echo Global Logistics increased revenue 22% year-over-year to $235 million and non-GAAP operating income by 12.4% YOY to $7.1 million. CEO Doug Waggoner commented, “Echo posted another quarter of double digit growth in revenue and earnings … Despite a difficult pricing environment, the consistent execution of our strategy is delivering profitability increases to our bottom line.”
Let’s face it — it’s not a glamorous business. Since ECHO stock went public Oct. 1, 2009, at $14 per share, it has achieved a total return of 43%, which when compared to its peers and the S&P 500, isn’t very good. So on the surface, I realize it doesn’t appear to be a microcap that’s set to overachieve in the next 20 years.
However, the need for third-party logistics isn’t going away, and Echo Global Logistics is showing clear signs of strong financial performance. At some point, ECHO stock will start catching up in a hurry.
Best Stocks #2 (Small Cap): Universal Display (OLED)
Universal Display delivers state-of-the-art organic light emitting diode (hence the OLED stock symbol) technologies for flat-panel TVs, energy-efficient lighting systems and more. Holding more than 3,000 OLED device, architecture and material patents worldwide, the move from LED to OLED is underway and the stakes are high.
Thus, Universal Display’s stock dropped by almost 19% on Nov. 22 — the day of the patent news — before recovering more than half of those losses by the end of trading.
Discovery Capital Management — an $11.3 billion hedge fund run by Rob Citrone, a disciple of retired hedge fund manager Julian Robertson — is the largest holder of OLED stock with 6.9 million shares as of the end of September. Citrone first bought shares in the company in Q1 2011 picking up 2.1 million shares of OLED stock. Over a two-year period, he has increased his ownership by more than 200%.
Without getting into a performance analysis of Citrone’s fund, Discovery had $2.8 billion, according to its 13F, when it first bought OLED stock, and as of Q3 2013, that number had risen to $11.3 billion — a 300% increase. Some of that is additional money, but some of that is appreciation. (Albeit, at this point, OLED itself hasn’t made Citrone much.)
I don’t know what’s going to happen in six months, let alone 20 years. However, I do know that OLED plays in a very exciting space, and Discovery Capital still seems to agree. Financially, OLED stock is solid, and if things go the company’s way in the coming years, it should get big in a hurry.
Best Stocks #3 (Midcap): Copa Holdings (CPA)
I’m a big believer in Latin America. While it has its troubles like every other emerging market, I continue to view its growing middle class with envy. While our middle class is being hallowed out, Latin America’s is growing exponentially. The U.S. was never more secure economically than when its middle class was growing, so history has demonstrated what this can do for a country.
Copa Holdings (CPA) is the parent company of Copa Airlines, a Panama-based airline that got its start in 1947 with help from Pan Am flying Douglas C-47 aircraft domestically. In the 1960s, Copa expanded to other countries close by and eventually jumped into bed with Continental for a 10-year stint ending in 2008.
Continental made out like bandits on their investment, but it likely would have done even better if it had hung around a while longer — CPA stock is up 415% since May 2008, when Continental sold the last of its shares.
Today, Copa has become the gateway between North and South America, and its strong operating margins reflects its dominance. In 2012, Kiplinger named Copa one of the World’s 10 Best Stocks, and in early December, author Kathy Kristof explained why she bought CPA stock for her real-money portfolio.
While airlines have their ups and downs, Copa is about the best I can think of to weather the storm.
Best Stocks #4 (Midcap): SVB Financial (SIVB)
I never would have thought one of my picks for the next 20 years would be a bank — let alone one that focuses on entrepreneurs — but here I am.
SVB Financial (SIVB) is a 31-year-old financial services company that includes a California bank (Silicon Valley Bank) that I’ve liked for a some time.
At the end of 2012, I suggested that SIVB would do well in 2013 because banks were moving to specialize, and it helps entrepreneurs in the U.S. and elsewhere grow their businesses. I’m happy — SIVB stock is up 78% year-to-date — but the question is whether the company will keep it up.
Well, I don’t know about next year or the one after that, but I do know that there is no regional bank better positioned to take advantage of the entrepreneurial spirit appearing to take root in countries like China, India and Israel. During the past 10 years, SIVB stock has grown its net income from virtually nothing to almost $200 million with $1 billion in revenue. That growth story has produced an 11% annualized total return in that time — 385 basis points better than the S&P 500, and a full 10 percentage points clear of its regional banking peers.
There’s nothing rotten with this apple.
I know it’s hard to pick stocks that are going to do well in three years, let alone 20, but I see SIVB becoming a large-cap by 2020.
Best Stocks #5 (Large Cap): Amazon (AMZN)
After seeing Amazon’s (AMZN) Jeff Bezos showing off its delivery drone project on 60 Minutes, I realized that he’s the Steve Jobs of logistics. He’s working on a plan to sell everything to everyone becoming the ultimate middle man.
The Wall Street Journal’s Holman W. Jenkins Jr. puts Amazon’s costs in question; Holman sees Bezos’ indifference to profits and costs as reckless.
I see it as the only way to run a company that desires more growth if it wants AMZN stock to flourish.
Take Amazon Web Services as an example. It has been around for seven years. In that time, the cloud computing phenomenon has taken off, and Amazon has been at the forefront of innovation. Focusing on cost control at this point of its history is business suicide. As Forbes’ Ben Kepes suggested in November:
“At the moment AWS is outperforming and out-innovating all comers. But nothing is permanent. The recent news from IBM (IBM) is a stark reminder that even those would be written off as dinosaurs have it in them to innovate. AWS should take heed of that and not take their foot off the gas, even for a moment. Even for a power house, the old adage ‘you snooze, you lose’ rings true.”
Kepes is 100% spot-on. To focus on costs at the expense of growth — and more importantly, innovation — is a loser mind-set at this point. Jeff Bezos is no loser.
I almost picked Google (GOOG), but I can’t turn my back on this kind of leadership. Buy AMZN stock and let time do its thing.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.