The Turnaround Artist - TSC

Return to Article

Play for the Long Haul With 10-Year Stocks

Arne Alsin

Sometimes it's best to buy and forget. The market is more volatile than reason dictates: The average stock oscillates 50% per year, while the long-term average gain in the market is about 9%.

Making big money in a stock -- generating a several-fold gain -- generally requires holding the position for several years. It means holding fast to a "buy and forget" mindset, ignoring the short-term whims of the market in favor of long-term appreciation.

This isn't to say that an entire portfolio should be held untouched for several years. Things change, and adjustments have to be made to positions. But the allure of a bet like the one Warren Buffett made in Coca-Cola (KO) in the late '80s, for example, is compelling: There are no commissions to pay, no slippage due to overtrading and not a dime of tax owed. And, to the extent you're committed to the position, you can flat-out ignore the market. It's relaxing just to think about it.

Great franchises selling at attractive prices, with market positions that are protected and growing, have a place in most portfolios. They're what I call "10-year stocks." From my cadre of companies, plus a new pick, here are the 10-year stocks that I currently intend to hold for the long haul. I think each of them can be a several-fold winner over the next decade.

Raymond James Financial

Sometimes you learn a lot about a company because of what it doesn't do. In the speculative bubble of the late '90s, Raymond James (RJF) stuck to gathering assets and growing its strong brokerage business. It didn't participate materially in the tech/telco/Internet IPO craze.

Even if the equity market has a mediocre decade, I expect this Florida-based company to continue to gather assets at a fast pace while building a force in asset management. This $1.6 billion company is still reasonably valued, generates a lot of free cash flow and has exceptional financial strength. See my Oct. 3 column for my net cash and money management valuation analysis. This stock closed Tuesday at $33.91.

Liz Claiborne

I don't see a lot of risk to Liz Claiborne's (LIZ) business model. Sales are diversified across a number of brands and channels. This company also has a strong management team, an impressive balance sheet and clean accounting as evidenced by its history of restructuring charges: It has the fewest of any company in its category.

There's plenty of room for growth at this $2.6 billion company over the next 10 years -- and with net margins currently depressed, there's room for margin expansion as well. Recently, Liz Claiborne entered a new sales channel through a rollout of products at Target (TGT) and has expanded in Europe with its Mexx acquisition. This company has a history of taking care of shareholders, using its ample free cash flow to aggressively buy back stock. It ended Tuesday at $25.22.

Hasbro

Like Coke and Pepsi (PEP) in the soft-drink market, two blue-chip companies control the shelf space in the toy market: Mattel (MAT) and Hasbro (HAS). Market share for Hasbro in certain toy areas includes board games (65%), card games (75%) and action figures (60%).

Hasbro is a premier company with premier brands, such as Parker Brothers, Playskool, Nerf, Play-Doh and Tonka, but because of a stumble last year, it doesn't command a premium valuation -- yet.

With a durable end market in toys, a diversified stable of products with low price points and the ability to generate strong free cash flow (at least $250 million per year, normalized), Hasbro, a $2.8 billion company, can be a multi-bagger for shareholders over the long haul, assuming decent sales growth of 6% to 8% and a return to historical margins. This stock closed Tuesday at $16.61.

Millennium Pharmaceuticals

I don't have a lot of patience for value players who think singularly in narrow, simplistic terms like low price-to-earnings or low price-to-book ratios. They'll always be investing in companies like Ford (F) and General Motors (GM). Those stocks are cheap, to be sure, but given the nature of their businesses, they should be cheap.

My latest pick for RealMoney.com, leading biotech company Millennium Pharmaceuticals (MLNM), is not a value stock in the traditional sense. But I see unrecognized value in a variety of areas, besides the obvious $1.5 billion in net cash. Collaborations and joint ventures with several big pharmaceutical companies are very valuable and will yield well over a billion dollars in future revenue. The product pipeline, though immature, is on par with that of the big pharmaceutical companies.

This stock is going to be volatile. But the business model, when it matures, is profitable and protected. Millennium might be a home run, but to get there from here, you'll have to weather a few storms. It closed Tuesday at $20.23, well off its 52-week high of $56.75 set last January. My best guess is that Millennium has the potential to go up 8 to 10 times over the next eight to 10 years.

Note: With this column, I'm changing my rating to a sell for both UAL (UAL), which I noted in a December column, and Dillard's (DDS), which I wrote about in November. This reduces my exposure to airlines and retail, while I'm adding my new pick of Millennium.