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If you want to make money in the stock market, time and time again analysts and academics have found that the best way to do it is through buying and holding stocks for the long term. You'll want to invest in stocks that have sustainble competitive advantages that will be hard to disrupt, as well as reasonable stock prices that give them a good chance of generating returns. Three stocks that really stand out as great investments for a decade-long time horizon are Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), American Tower (NYSE: AMT), and Nucor (NYSE: NUE). Here's a quick look at why all three are worth considering as long-term holdings in your portfolio.
Diversity & strong performance in one package
I know that I'm not trotting out anything revelatory here, but Berkshire Hathaway has been one of the best at capital allocation, thanks to the shrewd nature of Warren Buffett and his partner in crime, Charlie Munger. As a result, Berkshire has an empire of companies underneath it that today generate about $5.2 billion in free cash flow annually, which Buffett mostly uses to fuel stock investments or outright purchases of companies. This isn't large numbers working in the company's favor, either. Over the past 12 months, Berkshire has posted net income margins of 12.5% returns on equity of 10%.
This is what makes Berkshire such a compelling investment for decade-long time horizons. It is an incredibly diverse holding company, ranging from insurance, railroads, electric utilities, industrial manufacturing, and consumer goods. This immense diversity means that the cyclical nature of one part of the business doesn't have as large of an impact on the company as a whole. Typically, that amount of stability comes at the sacrifice of performance. As those numbers above suggest, though, you don't have to make that trade-off.
At a price to book value of 1.38 times -- the metric Buffett himself uses when evaluating Berkshire's stock -- it would seem that today's share price is a pretty reasonable time to buy into Berkshire and hang on for a decade or two.
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Profiting from people burying their heads in mobile devices
For a long time, there were two certainties in this world: death and taxes. Nowadays, we can add a third thing to that list: the need for data. Every day, our mobile devices chew through more and more data, and that is a trend that is only expected to rise, as faster options like 5G start to take hold. In 2015, average monthly data usage was 2.4 gigabytes. By 2020, that number is expected to grow to 14 GB per month.
The knee-jerk reaction for many investors would be to invest in the companies developing the technology that will make that much data usage possible. If there is one constant with technology, though, it's that it can rapidly become commoditized, and a company's pricing power evaporates. That is why American Tower is a great investment to ride this trend. You aren't investing in the technology that will drive this change; you're investing in the infrastructure that will make it happen.
American Tower is in the business of owning and operating cellular towers and leasing space for wireless equipment on them to telecom companies. This model gives the company a stable revenue source, as telecom companies sign lease contracts that can be 20 years or more. As customers demand more and more data, the property value on these towers will continue to increase, since telecom companies need more installed equipment to handle the required bandwidth. It should also be noted that American Tower is structured as a Real Estate Investment Trust, so it throws off cash to fuel a rapidly growing dividend.
It's hard to see a situation where we will use less data over the coming years, so that means we will need a very robust telecom infrastructure that will likely be installed on American Tower's base of communications towers. This is a trend that could fuel huge gains for investors over the coming decade.
When the time is right
Buying into cyclical industries like steel isn't a great idea all of the time. Like so many other commodities that are essential to development, it is an industry that is consistently going back and forth between times of incredible oversupply or undersupply. For years, China has been the primary engine for steel demand, so when demand there stagnated, it resulted in the low price environment we have been experiencing in recent years. It may seem a little counterintuitive, but this is a great time to invest in the industry, and Nucor is one of the best stocks to invest in steel.
The domestic steel industry has received a little bit of a boost lately from the Commerce Department's imposing anti-dumping tariffs on imported steel from several countries, most importantly China. While this is something that will improve margins, the real gains will come as the steel manufacturing overcapacity gets worked out of the global system. Eventually, unprofitable facilities will be shut down, and rising demand will lead to higher prices for Nucor and its peers.
What makes Nucor a more compelling investment, though, is that the company has remained a solidly profitable company throughout this downturn, thanks to its unique employee incentive structures and its lower debt burden. Both of these things deliver better bottom-line results, and they're also part of the reason that Nucor has been able to maintain a 42-year streak of dividend raises.
With shares trading at 3.1 times tangible book value and a dividend yield of 3.15%, I'll admit that this isn't the absolute lowest valuation for Nucor's stock. It is, however, a pretty good valuation to buy shares -- especially if you plan to hold those shares for 10 years or more.
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The Motley Fool owns shares of and recommends American Tower and Berkshire Hathaway (B shares). The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.