In the black: Diageo’s wide range of drinks, promoted by Mad Men’s Christina Hendricks, allows it to adapt to changing tastes
As investors, we are often enticed by the latest promising company set to take off and make us a fortune. Or lured by a much-hyped trend creating an ‘unmissable’ investment opportunity.
But what about the year-in, year-out solid performers? Are there companies – ‘for ever stocks’ – that can sit comfortably in a portfolio for years quietly growing your wealth?
They may not have a buzz around them, but what they lack in excitement they more than make up for in consistency.
Dan Lane is a senior analyst at investment platform Freetrade. He explains: ‘The mistake we all make as investors is to think we have to unearth the next trillion-dollar firm before anyone else. That would be an incredibly lucrative skill, but it’s not what we need to focus on when investing for the long term.
‘Taking a punt on which firm looks set to rocket is just that: a punt. Instead, we should aim to hold companies already showing their strength.’
THE ‘SECRET SAUCE’ THAT CAN HELP YOU SPOT A FOR EVER STOCK
James Thomson has run investment fund Rathbone Global Opportunities for 17 years and has held several stocks in the portfolio for more than a decade. He is wary of ‘fashion and fads’ and instead looks for stocks that will stand the test of time. He says: ‘There is a secret sauce I look for – in other words certain qualities that I believe companies which are highly successful over the long term are likely to possess.’
Thomson believes these companies should be easy to understand, with a scalable and repeatable strategy. He prefers companies that are a ‘pure play’ – in other words they do one thing and do it well, rather than diversifying into lots of different activities. That way, they can perfect what they do and retain their focus.
‘For ever stocks should also be doing something a little bit different that is difficult to copy,’ he adds. That ensures they are not easily threatened by new competition.
These are Thomson’s essential ingredients. But there are other components that will lead him to reject a company should they possess them. ‘I avoid companies whose success is out of their control,’ he says. ‘For example, commodity companies where the main driver of their share price is the price of iron ore, gas or copper.
‘Companies will also never be for ever stocks if they depend on binary events, for example wild cat oil exploration companies that will make a fortune if they hit oil or be worth nothing if they don’t. Find a company that has the essential ingredients, but without the warning signs, and you’ve got yourself a for ever stock.’
Rachel Winter, associate investment director at stockbroker Killik & Co, adds another ingredient she believes is important: adaptability. She explains: ‘As we search for new companies that represent the next big thing, we must also celebrate those companies that have survived for decades, continuing to flourish by demonstrating extraordinary levels of innovation and adaptability. Studies show that the most valuable employees to a business are those that exhibit high levels of flexibility, and the same can be said for constituents of a portfolio.’
FIRMS FAVOURED BY THE EXPERTS
Unilever ticks all the for ever boxes as far as independent wealth expert Adrian Lowcock is concerned. That’s because it has proven itself resilient regardless of the state of the economy. In other words, whether households are feeling flush or tightening their belts, we’re always going to need shampoo and washing powder, which Unilever sells.
‘The business makes money by selling goods that people need and will need to restock up on, no matter the economic climate,’ says Lowcock. ‘Unilever has a proven track record of delivering low but consistent and sustainable growth, which has supported long-term returns for investors.’
Diageo holds the for ever stock hallmarks for Freetrade’s Lane. It is a ‘pure play’ business as it just sells drinks – with brands such as Guinness, Smirnoff and Johnnie Walker, which was promoted by Mad Men star Christina Hendricks.
However, it’s the variety within its portfolio of drink brands that makes it a keeper, says Lane.
‘The company has spent a few years not just extending the offering, but bringing in premium options too,’ he says. ‘It now has Ryan Reynolds’ Aviation Gin as a super-premium gin option to complement Gordon’s and Tanqueray. Having the option to ride the wave of premiumisation is a good sign of the company’s ability to pivot and plan on the back of consumer sentiment.’
Diageo’s products remain resilient in all economic climates. Whether we’re feeling rich or poor, millions of us are always going to enjoy a drink.
But Diageo’s range of products means it can adapt to our tastes and budgets so there are options if we need to save the pennies or can afford to trade up. And it can pivot to changing tastes, such as the growing popularity of gin.
PayPal also makes the cut for Lane. He believes the payment firm is set to benefit as we move increasingly from cash to digital payments. It possesses both the focus that Rathbone’s Thomson looks for in for ever stocks and the adaptability required by Killik’s Winter. ‘Debit cards have now overtaken cash as the UK’s most popular payment method,’ says Lane. ‘But the next step will be from card to phone payment – and already making that easy are the likes of iZettle and Venmo, both owned by PayPal.
‘There may still be big card companies out there but a lot of them are built on legacy technology and have huge workforces in high-rise buildings to deal with. Nimble entrants with simple offerings and low fees have the chance to change with the times and keep up with consumer preferences.’
Winter adds: ‘There’s a reason some of the big growth fund managers in the UK have PayPal beside the likes of Mastercard and Visa in their portfolios.’
Tesco is among the for ever stock picks of Susannah Streeter, senior investment and markets analyst at wealth platform Hargreaves Lansdown. She believes that not only is it a retail giant, but it still has growth potential.
‘As a leading supermarket chain, a big chunk of Tesco’s revenues can be relied on as we all need to eat, and Tesco showed the extent it could mobilise its muscle to help feed the nation during the pandemic,’ she says. ‘In addition, 25 UK urban fulfilment centres are expected to open in the next three years, as part of the plan to double the capacity of the grocery delivery business.’
Streeter recognises that price pressures remain a risk, as rivals are cutting costs. But Tesco has built up a dominant market share, which gives it an advantage as it is known for its reliability.
US firms JPMorgan, Procter & Gamble, Abbott Laboratories and Disney are among Winter’s top for ever picks as they possess the adaptability she values. All began decades ago, but are still innovating.
‘JPMorgan can trace its roots back to Alexander Hamilton, and now counts itself as the biggest bank on Wall Street,’ says Winter.
‘Procter & Gamble was founded by a candlemaker and a soap maker back in 1837, and is now the largest consumer goods company in the world. Abbott Laboratories began life in 1888 as a producer of plant-based painkillers, and has grown into an international medical device manufacturer and major producer of coronavirus testing kits.’
She adds: ‘Finally, Disney deserves a nod too for still going strong at the grand old age of 95. It now has more than 100million subscribers to its Disney+ streaming service despite only launching it 18 months ago.’
Costco – another US stock – is one of Thomson’s most-loved for ever shares. He says that although the wholesale grocery seller is one of his most longstanding holdings, he rarely talks about it because it lacks ‘razzmatazz’, but its reliability means he and the team love it as much as their ‘sexy internet disruptor’ holdings, such as Amazon.
‘Long before the flywheel of Amazon Prime, Costco was one of the largest membership clubs in the world which drives incredible loyalty and repeat purchases,’ he says.
DON’T JUST BUY AND FORGET
Companies may have all the markers of a forever stock, but that doesn’t mean you can buy and forget about them indefinitely.
Laith Khalaf, a financial analyst at wealth platform AJ Bell, warns investors not to take the term literally. ‘I don’t really buy into the idea of a forever stock,’ he says. ‘While investors should definitely invest with a long-term view in mind, the reality is that markets and companies change, so if you’re choosing individual companies, you need to be willing to pay some attention to your portfolio, with at least an annual review.’
He explains that companies can change, for example through mergers, takeovers or changes in management. The market can also transform, rendering companies obsolete. Investors don’t need to change their portfolios every year, but they do need to remain vigilant.
Khalaf adds: ‘The only thing I would consider it appropriate to hold forever is an index tracker fund, like Fidelity Index World, which simply follows the market.
‘You might not get as good a return, but at least you know it’s just going to do what it says on the tin ad infinitum. Even then I would still encourage passive investors to keep an eye on fund charges – there are lots of tracker funds that were popular 20 years ago that look pretty expensive now.’
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