Credit: Shutterstock photoThese days it seems as if the market doesn't know whether it wants to break through fears of higher rates and a slowing China or crash lower into a new bear market. The VIX volatility index has jumped to an average 24.1 in the first month of 2016 against an average of just 16.7 in 2015. The S&P 500 tumbled 9% in the first three weeks and triple-digit moves in the Dow are a daily occurrence.
In the frenzy of daily trading, it's easy to lose sight of the long-term potential to make money. When asset prices plunge, it's easy to forget about the 221% total return on the S&P 500 since the bottom of the financial crisis in March 2009 or the 375% cumulative return over the last two decades.
In fact, the recent market selloff may be your opportunity to pick up some of the best performers of the last 20 years at a discount. A lot of these bellwether names saw their stock prices surge over the last few years but have come down to more reasonable values in the last month.
They've made millionaires of investors over the last two decades and may be ready to do it again in the next.
Mega-Cap Stocks For Mega-size Returns And Safety
Investors don't generally look to the older, mega-cap companies for strong growth and big profits but some of the best performers of the last two decades were mega-caps. All five of the stocks below beat the return on the S&P 500 and four would have made you a millionaire in less than 20 years on an initial investment of $100k.
Not only can mega-cap companies use their economies of scale and financial leverage to produce solid results but they are generally less volatile than their small-cap rivals. While past performance is no guarantee, mega-cap companies can use their massive size to acquire or develop new growth opportunities. Given the right catalysts, these stocks can provide the same surprisingly strong returns over the next two decades.
Five Mega-Cap Bellwether Companies To Own For The Next 20 Years
All five of these companies bested the annualized return on the S&P 500 over the past two decades, by an average of 7% over the market's return. Unlike their small-cap rivals, there's less doubt that these multi-national behemoths will be around when you get ready to retire. Besides that safety of principal, new catalysts could drive returns and make you a millionaire.
UnitedHealth Group (NYSE: UNH ) is trading for 17.7 times trailing earnings compared to a five-year average of 19 times earnings. The shares produced an annualized return of 15% over the past 20-years and pay a 1.75% dividend yield. Even on higher regulation and government scrutiny on margins, healthcare insurance is primed for tailwinds from universal coverage and an aging demographic.
UnitedHealth is one of the largest Managed Care Organizations ( MCO ) in the United States with 45 million medical members and processing over a billion prescription claims each year. The company has $9.9 billion in balance sheet cash and investments and has provided a total cash yield of 4.5% in dividends and buybacks over the past three years.
Paychex (Nasdaq: PAYX ) is the second-largest payroll outsourcing provider and has developed a competitive advantage in the small- and medium-size business market. The focus on small businesses gives it greater pricing power and it has recently been successful cross-selling ancillary products like insurance and retirement plans across its client base.
Shares trade for 17.2 times trailing earnings compared to a five-year average of 23.8 times earnings. Paychex produced an annualized return of 12.8% over the past 20-years and shares currently pay a 3.5% dividend yield. Increasing regulation, especially around health insurance, has been driving small- and medium-sized businesses to outsource their payroll and human services to companies like Paychex. This will continue to work in the company's favor and high switching costs means the company can keep a client for a very long time with an 80% retention rate.
Berkshire Hathaway (NYSE: BRK-A ) isn't among the top performing companies over the last two decades but has diversity of business line and strong management in its favor. While the 9.3% annualized return over the past 20 years is the lowest in this group, it's still higher than the 8.1% return on the S&P 500.
Berkshire is trading for 13.6 times trailing earnings, an 18% discount to its five-year average multiple of 16.7 times earnings. Insurance operations through four companies account for 25% of pretax earnings, lending stability to profits against longer-term value plays in the rest of the portfolio. The insurance operations also provide a consistent and sizeable stream of cash that can be used for opportunistic buying when deals come along. This stream of cash flow has been put to good use and has helped Berkshire grow its book value per share by an annualized 19.4% over the 50 years to 2014, nearly double the annual growth in the S&P 500. Investors can't expect Warren Buffett to lead the company over the next two decades but can expect the same long-term value investing that has done well in the past.
Apple (Nasdaq: AAPL ) is trading for 10.3 times trailing earnings, a discount of 28% compared to its five-year average of 14.3 times earnings. This isn't the first time that investors have abandoned the stock on fears of a slowing product cycle. The company has proven its ability to reinvigorate sales with product improvement combined with new software and services that expands its ecosystem.
The shares produced an annualized return of 26% over the past 20-years and pay a 2.0% dividend yield plus another 6.4% yield on the buyback. It's hard to imagine Apple being able to repeat the same performance over the next 20 years, doing so would mean a market cap of $55.7 trillion. Still, its ability to jumpstart the product cycle and cross-sell across the ecosystem offers the potential for ever-increasing cash flow.
The introduction of ApplePay in China with the UnionPay partnership could be the surprise investors are waiting for this year. Product cycle fears may be short-lived as the company releases the iPhone 6c and the iPhone 7 along with new iterations of the Apple Watch and iPad Air.
Marathon Oil (NYSE: MRO ) has fallen to negative earnings along with most of the energy space but has the means to survive the drop in prices and emerge stronger. The company has $2.4 billion in balance sheet cash, nearly 44% of its market cap, and no debt maturities until October 2017. The company has reduced drilling time by half and lowered well costs 30% over the last several years in its Eagle Ford wells. When oil prices stabilize and start to rebound, these efficiency gains will translate to big profits for the E&P major. The company also stands to benefit on the new ability to export its U.S. crude production after Congress lifted the 30-year ban on oil exports.
The shares produced an annualized return of 4.9% over the past 20-years even after the 80% slide since August 2014. Over the 20-years prior to the collapse of energy prices, Marathon produced a 14% annualized return. While management may have to cut the payout eventually, investors are currently earning a 14.3% dividend yield. Any look at a chart of oil prices over the last two decades shows how temporary low prices can be and mega-cap players like Marathon could be presenting a rare buying opportunity for long-term gains.
Risks to Consider: Historical performance is no indication of what returns will be in the future so make sure your picks have good catalysts to support their long-term performance.
Action To Take: Take advantage of the market selloff to position in these value names with upside catalysts and long-term performance that could make you a millionaire.
P.S. The billionaire who predicted the 2000 and 2008 crashes is predicting another crash in 2016. How is he preparing? By loading up on 35.7 million shares of a "Forever" stock. Click here to get the name of this billionaire, and the stock .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
