A favorite maxim of Warren Buffett is that the best time to sell is never. While not even the Oracle of Omaha abides by that advice all the time, his track record makes clear that owning a stock for an extra-long time is still a sound approach.
Yet finding the best stocks to buy and hold isn’t easy. So to help get you started, we asked three Foolish investors to pick a growth stock that they believe investors would be wise to buy now and hold for the long term. Read on to learn why they like these stocks.
best securities to invest in: Cisco Systems, Inc.(CSCO)
Cisco is a worldwide leader in the information technology industry. The company develops and sells networking hardware, telecommunications equipment, and other high-technology services and products. Cisco is currently sporting a Zacks Rank #2 (Buy) and is gearing up for another strong earnings season, with consensus estimates for the period trending upward and growth expected on the top and bottom lines.
Meanwhile, the stock is trading with a reasonable Forward P/E of 17.2, which comes at a discount to its industry’s average. The stock also has a PEG ratio of 2.9, so investors are getting a decent price for its EPS growth potential. Cisco also generates about $2.63 in cash per share and offers a dividend yield of roughly 3%.
best securities to invest in: AppFolio, Inc.(APPF)
Lewis: Yeah, it certainly seems like there’s a pretty good growth runway ahead of it. Why don’t we talk about company No. 2, and this is AppFolio?
Feroldi: Sure. This is a company that I really like a lot, too. These guys cater to the needs of small and medium-sized businesses that are kind of in niche, niche markets that you wouldn’t normally think of, and none of these are consumer-facing. AppFolio was founded, and their initial target market was the property management business. So, you think about companies that own, say, a small apartment complex or a multi-family building. If you were a property manager, what kind of things are critical to making your apartment profitable? Well, you need to attract clients. You need to make sure that they’re paying their bills. You need to be able to foster communication between the client and the property manager if there’s maintenance things. You need to help with background checks on potential tenants and screening.
So, there’s a hodgepodge of software that’s out there that can help with each of those things. AppFolio basically took all of that and put it together on a cloud-based platform, and they sell their service to property managers. So, they can come on to AppFolio’s platform, they pay a small subscription fee, and they get access to basically all of those services in one easy-to-use cloud-based system that can be managed through a cellphone or on a tablet.
Lewis: And you talk about this market, and even just hearing you describe it, property managing software, there’s a niche there. [laughs]
Feroldi: It’s pretty niche.
Lewis: There’s a pretty clear niche. And frankly, it’s a space that’s probably a little too small for big players to want to hop in.
Feroldi: Absolutely, yeah. There can be a big advantage to stay in the niche. The big software boys, it’s just not a big enough market for them to go after, to really invest the resources to make a customized solution. But, AppFolio, they’re not so much a property management company as they are just trying to dominate a few small niches, and by combining them together, they can grow into a much bigger software platform.
Lewis: Yeah. They’re getting outside property management, right? They’re doing something in the legal space, as well?
Feroldi: Exactly. A couple of years ago, they bought a company called MyCase, which caters to the needs of legal professionals. So, you think about a small law practice. Well, they also need help with billing and tracking their time and attendance and marketing themselves. There’s always back-office stuff that these companies need help with. So, AppFolio recently entered into that business, too, through an acquisition. It’s still very small, it’s less than 10% of their revenue. The property management business is about 90% of their market right now. But, between these two, they’re adding customers to both platforms at a double-digit rate.
The way that they make money is, their customers pay a recurring monthly subscription fee just to be on the platform, but they also sell premium, what they call value-plus services, on top of that. So, if you wanted AppFolio’s app to facilitate taking money out of the client’s checking account and sending it over to the property manager, like, so they can pay their rent, AppFolio’s platform can do that for them, and they charge an extra small fee for that. Or, if they wanted to do a detailed background check when they’re screening for tenants, you can also do that on AppFolio’s platform, but they also charge a small fee for those kinds of services.
Lewis: You talked about the stickiness of the platform. I think they have a customer retention rate of 97% or something crazy like that.
Feroldi: It’s extremely high. That’s a big reason why I love software-as-a-service businesses. Once a customer gets into the platform, and their entire back office gets set up around using this platform, it becomes extremely painful for them to consider switching providers, because everything is built for this one platform. So, it makes the business very, very sticky.
Lewis: And, you have employees that are trained on using that, right? So, there’s the actual friction of switching systems and maybe not having the data interplay the way that you would like it to, but there’s also the cost of having to retrain employees to use these programs or to bring in vendors and review these offers from new vendors, which is going to be tough for everyone’s time, especially if you’re a smaller business.
Feroldi: Absolutely, especially since, if you’re a smaller business, you don’t really have time to do that kind of stuff. AppFolio is growing its top line extremely quickly. Last year with 40% year over year top line growth, about $144 million in revenue. So, again, they’re going after niche markets, but they’re still big enough to actually become profitable, become cash flow positive. Their balance sheet is squeaky clean. Another thing I like about this company in particular is, the founders of the business are the Chief Technology Officer and the Chief Strategy Officer, so they’re still very involved. Very high inside ownership rates. And, this is another company that just gets rave reviews from employees about the culture that they have.
best securities to invest in: Mellanox Technologies, Ltd.(MLNX)
Mellanox Technologies is a leading supplier of semiconductor-based, interconnected products to world-class server, storage, and infrastructure OEMs. The company’s VPI enables standard communication protocols to operate over any converged network with the same software solution.
MLNX has started to pick up steam after its fourth consecutive earnings beat. It is also an explosive growth pick, with earnings and revenue expected to improve by 78% and 19%, respectively, this year. Shares are currently trading with a reasonable Forward P/E of 20.8 and an attractive PEG of 1.4.
best securities to invest in: Boeing Company (BA)
I was one of many in the business media writing about Boeing Co’s (NYSE:BA) stellar first-quarter earnings April 25. Boeing delivered adjusted earnings per share of $3.64, 41% higher than the consensus estimate. While we’re on the subject of beats, its free cash flow was $2.74 billion, 84% higher than analyst expectations.
“Well it’s not every day that a mega-cap company beats consensus by 40 percent,” Robert Stallard, an analyst with Vertical Research Partners said in a note to clients. “The wall of cash that the company is generating makes it hard to be absent from the stock.”
Based on an enterprise value of $196.4 billion and a trailing 12-month free cash flow of $12.6 billion, Boeing has an FCF yield of 6.4%, a perfectly decent yield for a company that’s firing on all cylinders at the moment. Here’s what I had to say about Boeing in April a couple of weeks before earnings:
“Now that I’m back on Boeing wagon, I do believe that Boeing stock could deliver 20%-25% compound annual growth over the next five years,” I wrote April 10. “If it does, a $1,000 stock price is not out of the realm of possibility.”
After its strong first quarter, I have no doubt it’s possible by 2023.
best securities to invest in: Cliffs Natural Resources Inc.(CLF)
Cleveland-Cliffs Inc (NYSE:CLF) is one of the few stocks enjoying Friday’s trading session, up more than 10% after beating on earnings and revenue expectations.
The trend-line of support looks good, especially with CLF rocketing higher on the day. But bulls will have a big test soon if they keep taking CLF higher: $8.50. This level has been Major — with a capital “M” — level of resistance over the last few years. Bears will surely take a shot on the short side at this level, but if bulls can ultimately push through, $10 becomes the next target. It helps that energy prices have been strong.
Keep this one on your radar.