Paying for your kids to go to college is one of the biggest reasons to invest in the stock market, especially with the ever-growing cost of college. Parents with kids hopefully heading to college in five, 10, or 15 years want stocks that can deliver steady, reliable growth over a medium- to long-term time frame.
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Learning in bulk
Demitri Kalogeropoulos (Costco): Saving for a child's college fund invites a delicate trade-off between aiming for strong returns and minimizing the risk that a downturn pummels the stock at just the wrong time. Costco strikes the right balance between those competing priorities, in my view.
The bulk retailing giant is performing well in today's high-growth environment, with sales spiking 9% in August to cap a strong fiscal 2018 year. That boost implies its market share is holding up well against peers like Walmart and Target, which have each recently announced some of their strongest customer traffic figures in years.
Meanwhile, Costco's base of membership income gives the business stability that Walmart and Target lack. Earnings are highly predictable given the fact that over 90% of its shoppers renew their subscriptions each year.
Priced at 30 times expected profits, compared with 20 for Walmart and 16 for Target, investors aren't getting a screaming deal with Costco shares today. But in exchange for that premium, you receive market-leading sales growth and earnings that tend to rise even during industry recessions. That should put you in a good position to accumulate healthy returns over the medium term.
Take advantage of Tencent's decline while you can
Steve Symington (Tencent): With shares of Tencent down more than 20% so far in 2018, you'd be forgiven for thinking the Chinese social media and gaming giant's business was seriously faltering. But you'd be wrong. Rather, Tencent has largely been dragged down along with the broader Chinese stock market, which is trading near a four-year low amid trade tensions between the U.S. and the Middle Kingdom.
I'd be remiss if I didn't note that Tencent has had its own company-specific challenges. Though it technically exceeded consensus top-line estimates when it told investors second-quarter revenue grew more than 30% year over year, for example, Tencent did admit that its gaming segment -- where revenue climbed only 6% in Q2 -- was a "key area of weakness." This was primarily because China's government recently instituted a temporary suspension in approvals for new game licenses during a regulatory department shake-up, which means Tencent was temporarily unable to monetize its massively popular gaming titles, including Fortnite and PlayerUnknown's Battlegrounds.
Still, Tencent CEO Ma Huateng was quick to point out that Tencent saw "healthy growth in the number of people playing our mobile games each day in China and overseas," and promised the challenge would pass once regulators officially resume their approval process.
When that happens, I think Tencent's true strength and long-term promise will finally begin to show. And I think investors who take advantage of this pause stand to be handsomely rewarded in the process.
The entertainment king
Jeremy Bowman (Disney): If you're looking for an affordably priced stock with a slew of competitive advantages and steady growth, Disney looks like as strong a bet as any. The entertainment company trades at a P/E ratio of just 16.6, a significant discount to the broader market, and the company has a leading position in diverse businesses like sports television, theme parks, and blockbuster movies. It also owns a number of popular brands, including Marvel, ESPN, Lucasfilm, and Pixar, as well as its namesake, that have delighted children and families for generations. The combination creates a powerful network of competitive advantages and significant pricing power.
Though Disney has struggled with the decline of cable, which has pressured profits in its biggest segment, the company is finally taking steps into streaming with ESPN+, which was launched earlier this year and just reached 1 million subscribers, and an upcoming streaming service for general entertainment next year. In addition, the prospective acquisition of Fox would give the company even more brand firepower, acquiring franchises like The Simpsons and giving it more content for its upcoming streaming service. If the deal goes through, Disney would also become majority owner of Hulu, giving it a third streaming service.
The risk from cord-cutting now seems fully priced in, and Disney's other segments like theme parks and studio entertainment continue to deliver solid growth. The House of Mouse should be a reliable growth stock for parents over the next decade or so.
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Demitrios Kalogeropoulos owns shares of Costco Wholesale and Walt Disney. Jeremy Bowman has no position in any of the stocks mentioned. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tencent Holdings and Walt Disney. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.