Warren Buffett is not a fan of diversification, but he has an eye for breakout stocks. Although he owns dozens of companies in Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) he’s really made only a handful of big bets on a few businesses. Just five stocks comprise 75% of his portfolio.
He told Berkshire shareholders in 1996, “diversification is, as practiced generally, makes very little sense for anyone that knows what they’re doing. Diversification is a protection against ignorance.” Investing in only three stocks is probably all anyone needs to do, he said.
Maybe because I don’t have the acumen of Buffett (or access to the special privileges regulators afford him) I’d be leery of letting it all ride on a trio of companies. Yet I agree with Buffett’s “20-slot rule.” It says to imagine you have an investment card with only 20 slots to fill in your lifetime.
After buying 20 stocks you can’t buy anymore. Such an exercise makes you focus on picking only the most likely breakout stocks.
Below are seven breakout stocks that can go a long way towards filling your card. They promise at least a decade’s worth of growth for your portfolio, and probably many more years after that too.
Apple (AAPL)
The first stock on your breakout stocks punchcard list should be Apple (NASDAQ:AAPL). Buffett believes it’s so good he’s devoted 45% of his portfolio to it even after selling off a bunch of shares recently.
It has a preeminent position atop the consumer electronics market that benefits from a highly integrated ecosystem. All of Apple’s hardware, software and services mesh to drive sales and profits. It’s why it’s one of the top Magnificent Seven stocks to still buy this year.
Quality products create a stickiness that consumers find difficult to leave once ensnared. A continual cycle of improvements and upgrades then encourages them to routine spend more. Each area is woven into another so that an iPhone buyer ends up buying more iCloud storage to fill with photos or music from iTunes.
Services is the fastest growing segment of Apple’s business. Revenue hit a record $23.1 billion in the fiscal first quarter, up 11% from last year. Apple also has well over 1 billion paid subscriptions across its various services, nearly double the number it had three years ago.
Services are only second in importance to the iPhone, which saw sales jump 6% to $69.7 billion last quarter. Apple also recently surpassed Samsung as the world’s largest smartphone retailer for the first time in 12 years.
Nvidia (NVDA)
Chipmaker Nvidia (NASDAQ:NVDA) should probably be the second stock you fill your card with. It’s likely one of the breakout stocks set to keep going.
Another top Magnificant 7 stock to buy in 2024, Nvidia dominates the artificial intelligence market. Its chips can handle the complex processing needs of AI while creating its own ecosystem through the Cuda platform that offers greater user control.
Even though the chip company faces more competition from rivals introducing their own AI chips, they will, at best, erode NVDA stock’s lead at the edges while not coming close to dethroning its position.
Nvidia also owns the graphic processing unit market thanks to data centers needing AI accelerators in greater numbers. The semiconductor stock also finds itself well-positioned within the central processing unit, or CPU, market.
The biggest concern for NVDA stock is valuation. Shares have tripled over the past year and are already up 48% in 2024. Yet because the GPU leader has become a finely tuned engine where all cylinders are firing at peak performance, the likelihood is the stock just grows into its valuation. Even if it were to fall back now, over the coming decade Nvidia will still generate handsome returns for investors.
Costco (COST)
Switching from technology to breakout stocks in the consumer sector, Costco (NASDAQ:COST) is a standout choice for long-term breakout growth.
The warehouse club is a profits-generating juggernaut that has tripled earnings over the past decade. The stock produced a total return of 677% over that period compared to a 228% return by the S&P 500.
Simultaneously, Costco grew its dividends at a compounded rate of 12.6% annually in the last 10 years. And there is more growth coming in the future. One of the easiest ways COST stock can boost both the top and bottom line is by increasing membership fees.
It routinely does that every five or six years, and management itself has essentially said it is a matter of when, not if Costco raises prices again.
Because of the value consumers gain from membership, the income derived from an increase flows unencumbered down the income statement. Of course, the value also grows in high-inflation, high-interest rate environments such as we’re in. The warehouse giant has multiple levers of growth it can pull for the next decade and beyond.
Microsoft (MSFT)
Swinging back to the tech sector, Microsoft (NASDAQ:MSFT) should also be high on any investor’s buy list. For many of the reasons Nvidia is pushing higher, Microsoft is rising too.
It has transformed itself into an AI stock by plugging in all of its products and services to OpenAI’s generative AI chatbot ChatGPT.
From its CoPilot search engine to the Azure cloud services business, Microsoft infused every aspect of its business with AI. CEO Satya Nadella told analysts that 50% of all Fortune 500 companies use its Azure AI models and there are now 53,000 Azure AI customers.
Segment revenue jumped 24% to $33 billion from a year ago, 600 basis points of which were due to Azure AI services. That’s twice as much as AI contributed in the prior quarter.
While CoPilot features the latest iteration of ChatGPT, Azure is likely to be where Microsoft sees the most growth going forward. Cloud-only environments will continue to expand but hybrid solutions will be the preferred method as business moves data to the cloud. Azure’s presence in brick-and-mortar data centers gives it a competitive edge.
Microsoft also generously rewards shareholders with stock buybacks and dividend growth making it a stock to own for the next 10 years.
Ares Capital (ARCC)
Ares Capital (NASDAQ:ARCC) is the largest, publicly-traded business development company (BDC) owning over 500 middle-market businesses worth almost $23 billion.
Like real estate investment trusts, BDCs must pay out at least 90% of their taxable income as dividends to shareholders, which results in high dividend yields. Ares’ dividend yields 9.5% annually today. The base dividend offers investors a decade of growth exceeding 26% a year.
What makes ARCC stock an interesting long-term play is the BDC invests in private markets. While it spreads its investments out over many industries and geographies, it leans heavily into software and healthcare companies, which make up over one-third of the portfolio.
While the increased borrowing costs a high-interest rate environment imposes have weighed on Ares Capital’s performance over the past year, the company is still in fine financial form. Its businesses should continue providing stable returns and their defensive, diversified nature suggest it should continue growing in the future.
ASML (ASML)
I can’t help getting in one more tech stock into this group because of its monopolistic industry position. ASML (NASDAQ:ASML) is the only manufacturer of extreme ultraviolet light lithography machines required for creating the world’s most powerful semiconductor chips.
This limited production equipment costs about $200 million each. ASML sold only 40 of them last year, but demand is increasing due to pressing chip foundry needs. Taiwan Semiconductor Manufacturing (NYSE:TSM), Intel (NASDAQ:INTC), and Samsung are all clamoring for them because of AI demand.
It is also making next-generation high-numerical aperture lithography systems that allow customers to produce even smaller chips. It shipped the first one to Intel in December and they sell for about $300 million each.
There will be no end to demand for ASML’s equipment. OpenAI, for example, just released its next AI advance, Sora, which is a text-to-video generator. The hyperrealism achieved pushes the boundaries of generative AI and will spur the next level of chip development.
The power and complexity required to produce such scenes at scale will push ASML to new heights over the next decade.
American Tower (AMT)
The last breakout stock for this list is a bit of a sleeper. American Tower (NYSE:AMT) will fly under the radar of many investors because it’s not an especially sexy business like AI chips and equipment.
Instead, American Tower rents out space on its towers to telecommunication companies, radio and TV broadcasters and the government.
The ongoing rollout of the 5G network infrastructure makes AMT stock’s business all the more relevant. American Tower operates on long-term leases averaging five to 10 years and often includes annual escalators to ensure stable revenue growth.
The tower company suffered from a period of telecom industry consolidation that has since passed. Although the U.S. market is more mature, there remains plenty of growth to come. Further, there is significant international expansion available, especially in developing and emerging markets. Latin America and Africa represent two of American Tower’s biggest opportunities.
AMT stock is down 13% year to date because of high interest rates but the Federal Reserve is looking to cut rates. That opens a window for an extended buying opportunity at a discount.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
