Time in the sharemarket is the biggest advantage available to young investors. The younger the investor, the more time they have to earn life-changing capital gains by staying invested in the market over the long term.
The very best business may be able to sustain compound growth rates of 18 per cent per year, which means an investment will double in value after four years, quadruple after eight years, jump eight-fold over 12 years, and 16-fold over 16 years. Even if a retail investor returns 12 per cent a year over 10 or 20 years, the profits can lead to generational wealth.
That means $10,000 invested by a 30-year-old today could turn into $160,000 by the time they reach 46. Professional investors, however, say very few companies boast the qualities to produce these kinds of returns.
“If you find the right business, you’ve still got to hold on over the very long term,” says Nathan Parkin, the co-founder of Ethical Partners. “It’s much easier said than done, and it’s a little out of fashion at the moment. Get-rich-quick with crypto and memes is popular with young people now, but you can lose it all, and nothing beats sitting in a terrific business for a long time.”
“It’s hard to think five years-plus ahead and ask yourself what companies will exist and grow over the long term,” says Parkin. “And even if you do find one, you’ve still got to buy it at an attractive price.”
This kind of basic investment advice is also popularised by US investor Warren Buffett, who regularly emphasises how buying and holding great businesses has helped stock in his investment group Berkshire Hathaway return more than 19 per cent per year since its inception in 1965.
Buffett owns globally renowned brands like Coca-Cola, iPhone maker Apple, and payments giant American Express and says wealth creation involves nothing more complex than identifying and buying great businesses.
To unearth some potential wealth compounders over the very long term, The Australian Financial Review asked five professional stock pickers for their views.
Stocks they like
Parkin cites Australia’s stock exchange operator the ASX as a buy. He says it has a monopoly-like position and limited competition, which means it’s likely to grow revenues and profits steadily over the long term.
“It’s also out of favour, so the [share] price is attractive,” he says. “It’s straightforward how it makes money, as it’s central to the operation of Australia’s financial markets, and it should be able to grind out steady growth for a long time with a balance sheet that’s gold-plated.”
Parkin also likes rubbish removal giant Cleanaway Waste Management, and says it’s unlikely to face stiff competition given the investment and scale required to muscle in on the giant waste removal industry.
“We think it’s really hard to replicate infrastructure, and Cleanaway’s management team is putting a whole host of initiatives in place to grow earnings. It’s a company we think has a nearly unassailable position in terms of assets,” he says.
Lachlan Hughes, a portfolio manager at Swell Asset Management, says the best healthcare businesses offer an opportunity because demand for medical services will grow in line with a cashed-up, ageing population.
Hughes likes $47.2 billion ASX-listed healthcare and sleep therapy giant ResMed as a buy.
“It’s just a well-run business and has around 22.5 million customers in an addressable market of 1 billion people,” he says. “We think it has decades of growth ahead as the penetration is low and it’s the number one player in its market.
“The price is off as people said the GLP-1 (weight loss) drugs will negatively impact demand, but we take the opposite view and believe demand for these devices continues to thrive.”
Hughes also likes New York Stock Exchange-owner Intercontinental Exchange as an investment option, in part due to its innovative push into the US mortgage servicing space.
“It’s a well-positioned, high-quality business,” he says. “If they cut interest rates, it will benefit, and we see the mortgage business as a real growth driver over the long term.”
Qiao Ma, of Munro Partners, portfolio manager of the Munro Global Growth Small & Mid-Cap Fund, is targeting the energy transition as an investment theme.
Ma likes Nasdaq-listed Constellation Energy as a producer in the clean energy sweet spot of nuclear, hydro, wind, and solar-generated power.
“Demand for clean energy is skyrocketing, driven by various drivers such as the ever-growing energy needs to power AI and data centres, reshoring of critical manufacturing, and the global push for decarbonisation,” she says.
“This surge in demand, coupled with a limited clean energy supply, creates a long-term advantage for Constellation Energy.”
Another business she likes is Swiss running shoe merchant On Running. The retailer is held in both the Munro Global Growth Fund and Munro Global Growth Small and Mid-Cap Fund. “They’ve become a global phenomenon in just 15 years.”
On Running’s New York Stock Exchange-listed stock has soared 56.1 per cent over the past 12 months.
Growth-focused stock picker Michael Frazis, the Gen Y founder of Frazis Capital, is still focused on the tech sector to unearth tomorrow’s huge winners.
His flagship Frazis Capital Partners Fund is up about 56 per cent in 2024 to May 30 as its growth-focused style means it tends to soar in rising markets, but drop during steep downturns.
Frazis picks $US2.6 trillion semiconductor darling Nvidia as the leader in artificial intelligence to profit from soaring demand for computer chips from internet platforms Google, Microsoft, Facebook and Amazon.
“Nvidia announced that hyperscalers (Google, Amazon and Meta) are generating returns of five to seven times on investment in Nvidia’s [computer] chips,” says Frazis. “The purchase price is often paid off within 12 months. It’s the high returns to their customers driving enormous revenue growth that can continue.”
Another selection is DroneShield. It’s an ASX small cap that sells drone detection and disruption hardware to civilian and military authorities. The South Australian-made hardware is in demand as drones rise in popularity and patrol battlefields in conflict zones such as Ukraine.
“DroneShield recorded revenues of $55 million in 2023, more than triple the $17 million in 2022, and analysts forecast 2024 revenues of over $90 million, with the bulk coming from high-margin defence contracts,” says Frazis.
“The opportunity is immense. Less than 1 per cent of infantry units, ships, military bases, and civilian targets are protected against low-cost drones.”
Theo Maas, another leading technology stock picker and portfolio manager at Northcape Capital, also likes Nvidia.
He says Nvidia’s March quarter results point to an acceleration in demand for AI infrastructure construction. “All roads continue to lead to Nvidia. We expect demand to remain very robust and competition is very limited in the near- to medium-term.”
As a final bet for steady long-term growth, Maas likes $US86.4 billion wireless infrastructure operator American Tower. He reckons a small share price decline in 2024 is an opportunity to buy in as American Tower is positioned to profit from growing demand for mobile phone traffic globally.
“With the Indian business is being sold, the growth in the US, Europe and emerging markets like Latin America is not priced in,” says Maas.
This article was originally posted by The Australian Financial Review here.
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Disclaimer: This material has been prepared by the Harry Perkins Institute of Medical Research, published on 11 June 2024. HM1 is not responsible for the content of linked websites or content prepared by third party. The inclusion of these links and third-party content does not in any way imply any form of endorsement by HM1 of the products or services provided by persons or organisations who are responsible for the linked websites and third-party content. This information is for general information only and does not consider the objectives, financial situation or needs of any person. Before making an investment decision, you should read the relevant disclosure document (if appropriate) and seek professional advice to determine whether the investment and information is suitable for you.
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