Not every stock in which you invest will be a game-changer for your portfolio. Some will be duds, others will more or less follow the market, and a select few will do incredibly well. Those stocks are the ones that are going to generate fantastic returns for you over the long haul and cover up for any of those missteps you may have made with other stock picks.
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So we asked three of our investing contributors to each highlight a stock they foresee as one with the potential to double over the next decade. Here's why they picked Welltower (NYSE: HCN), InVitae (NYSE: NVTA), and A.O. Smith (NYSE: AOS).
Strong demographic tailwinds and a recession-resistant business
Matt Frankel (Welltower): Healthcare real estate investment trust (REIT) Welltower, could deliver excellent performance over the coming decade, for a few reasons.
First, the company primarily invests in senior-oriented healthcare properties, such as senior housing and medical offices, and the elderly population in the U.S. is expected to sharply rise over the coming decade, which should create a steady stream of demand growth. In fact, the American Seniors Housing Association projects that annual demand growth for senior housing units will soar from about 25,000 per year currently to 92,000 per year during the 2025-2030 period.
Second, Welltower does much of its growth through acquisitions, and the next decade could see major REIT consolidation in the healthcare industry. Currently, about 15% of healthcare properties are REIT-owned, as compared with 40% or more for property types such as hotels and malls. Healthcare real estate is a $1.1 trillion market, and as the largest healthcare REIT, Welltower has a major advantage in terms of financial flexibility and economies of scale.
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In addition, I believe Welltower could double over the next decade even if the stock market takes a dive. Simply put, healthcare is perhaps the most recession-resistant type of real estate -- after all, when times get tough, people can stop shopping at malls, stop staying at hotels, and move to cheaper apartments. Healthcare remains a top priority no matter what.
It's also important to point out that Welltower pays a 5.7% dividend yield, so if the company's stock price doubles over the next decade, it would translate into a pretty impressive total return of about 13% annualized, which is actually less than Welltower's average throughout its 47-year history.
Epicenter of the genetic testing revolution
Maxx Chatsko (InVitae): There's a lot to love about genetic test provider Invitae -- and a lot that may make investors cringe at the moment. It's growing year-over-year revenue at triple-digit clips, a trend that looks likely to continue in 2018 considering two major acquisitions will begin contributing. But the hypergrowth has been accompanied by the bitter taste of dilution and mounting losses.
Owning InVitae today requires investors to take a big leap of faith and believe in a long-term vision that has yet to be proven in the market. The central question: Will Invitae ever turn a profit? That seems unlikely in the near-term, as the company will need to pour money into sales and marketing (and genetic counseling) to continue growing the platform, which will likely outpace any growth in gross profits for the next couple of years.
But if you're giving me a decade, then I love InVitae's chances to double. There will no doubt be more near-term dilution, which will erode returns to some extent, but the company continues to increase its market share in a market that's exploding in value. And we can't even imagine all the industries that will arise from genome-related services in the next 10 years.
Considering today's market cap sits at just over $500 million, there's plenty of room for the genetic-testing leader to turn in a performance that allows share gains to outpace dilution and still deliver a multi-bagger investment opportunity. Investors need to remain cautious in the near term and be willing to ride out above-average volatility, but InVitae's hyper-growth today promises big potential for creating shareholder value tomorrow.
Stars aligning for this under-the-radar business
Tyler Crowe (A.O. Smith): Over the past few years, the investment thesis behind water-heater manufacturer A.O. Smith had two components: a steady business in North America that produces free cash flow, and a fast-growing international segment thanks to more people entering the middle class in countries such as China and India. Over the past decade, these two markets have been lucrative for A.O. Smith, as it has been able to grow earnings per share by more than 300%.
Even if this remained the investment thesis for A.O. Smith, chances are it would more than likely double its earnings per share over the next decade. Recently, though, there is a new element that could help boost the company's bottom line even more: a robust housing market in the United States. According to the St. Louis Federal Reserve Bank, new residential housing construction increased to 1.3 million units in November 2017, the highest since the recession. As good as that sounds, though, it's still well below the long-term historical average for housing starts.
The millennial generation -- currently between ages 20 and 37 -- is the largest age cohort since the baby boomer generation, and many of them are entering the housing market for the first time. As this generation moves into the homeowner category over the next several years, they're going to help fuel more and more housing starts, which of course means more water heaters for new construction.
Granted, most of A.O. Smith's sales in North America are replacements rather than new construction, but North America is a high-margin business. Any incremental sales here are going to have a more profound impact on the bottom line than its lower-margin sales internationally.
These three elements combined make for a great market over the next decade or so, and A.O. Smith's high-margin, low-capital-intensity business is likely to benefit immensely from these trends. If these trends continue to play out, A.O. Smith could easily double in the next decade.
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Matthew Frankel has no position in any of the stocks mentioned. Maxx Chatsko has no position in any of the stocks mentioned. Tyler Crowe owns shares of A. O. Smith. The Motley Fool recommends Welltower. The Motley Fool has a disclosure policy.