A thought experiment in long-term investing: What stock would you buy for a newborn?
Recently—like today—the editors at MSN Money asked me to write a blog post on what stock you should buy for a newborn. I think it’s an interesting thought experiment in long-term investing even if there is no baby shower on the horizon. Below you’ll find that post.
Pampers, check. Binky, check. Goodnight Moon, check.
But what do you give the baby for a portfolio warmer?
It’s an interesting thought experiment for anyone who claims to be a long-term investor, even if there is no baby shower on the horizon. So what stock would you buy if you had a 20-year holding period ahead of you?
Something cheap now because it’s either deeply out of favor or barely a glint in a Sergey Brin’s eye. (Unlike say, asteroid mining.)
Something with a long-term and very solid trend at its back.
And something so stable that it’s certain to be around in 20 years.
So, no Apple (AAPL)—already too expensive and unlikely to king of the technology hill in 20 years.
Gold? Certainly will be around in 20 years and it’s hard to bet against depreciating currencies and inflating prices for the next 20 years. Though even with the recent pullback, gold is hardly cheap and it’s certainly not deeply out of favor.
European stocks? Everybody hates them, but when’s the recovery? Six months (in your dreams but still possible)? Two years? Never? Too unpredictable.
Natural gas? Deeply out of favor, true. But I’d bet the recovery is two to five years away rather than 20. Within a 20-year horizon, I think baby’s natural gas portfolio could go through two or three more boom and bust cycles.
My choice, finally, and hands down is the solar sector. It’s still collapsing (sorry, I mean “rationalizing production”), but costs are still coming down (at the survivors), the world will continue to need more energy (especially if everyone aspires to U.S.-style energy consumption), and even if the world turns out to have as much natural gas as is currently predicted by models that have only the sketchiest of data on depletion rates for natural gas from wells in shale formations, costs for producing that energy will continue to climb.
But what solar stock?
No guarantee that any of the independents, such as First Solar (FSLR) will be able to find the cash to get through the sector rationalization without a bankruptcy. Q-Cells, once the biggest manufacturers of solar cells in the world, filed for bankruptcy this month.
China’s solar companies such as Yingli Green Energy (YGE) or Trina Solar (TSL) now have the backing (and deep pockets) of the Chinese government behind them. But that backing is subject to changes in the political wind and the government in Beijing has a disconcerting habit of shuffling assets among companies in a sector in order to further national economic goals. (The mobile phone sector is a chilling example.)
My pick for 20 years finally goes to a U.S. company with an oil company parent, SunPower (SPWR). The stock is certainly cheap: It’s down 65% in the last 12 months and even more if you go back to November 2007 when this current $5.42 a share stock traded at $129.23. But Total (TOT), Europe’s third-largest oil company, bought 60% of SunPower in April 2011, giving the solar company that backing it needs to be one of the survivors in this industry collapse. (Total’s cash resources also give SunPower the ability to finance the kind of utility-scale energy developments that are currently the biggest source of growth in the sector.) And SunPower, which has its origins in Silicon Valley’s chip industry, continues to make progress at taking costs out of its manufacturing process and increasing the efficiency with which its cells convert sunlight to electricity. On April 16, SunPower announced that it was on track to hit its goal of generating electricity at a cost of 86 cents an efficiency-adjusted watt by the end of 2012. (SunPower is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ . Yingli Green Energy is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/the-jubak-picks/ and my long-term portfolio.)
So stuff a few shares—or more since at $5.42 you can afford to be generous—in the snuggly and whisper “Solar” into baby’s ear.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple and Yingli Green Energy as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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Nobody has a crystal ball of what the solar or rest of the energy sector will look like in 20 years. They are essentially technology companies and for every Apple or Microsoft there’s a large junk yard of companies that were killed off by creative destruction. (AOL anyone?) Will another company make a break through in solar that will kill First Solar’s edge? Or in wind or in bio mass? Too hard to know.
I would go with something more steady eddie: consumer company like P&G, or health care like J&J, or a railroad like UNP. Boring yes but much more likely to be around in 20 years for jr’s college fund.
Having a couple of grand babies that just turned 3 month old this is a pertinent question. I am in the process of funding a 529 college plan and need to invest. Will probably go with VYM which invest in high dividend large cap stocks and a foreign stock EZTF. No bonds.
Great idea for an article Jim.
Jim- fine question, and we are supposed to toss out a few ideas too, right? You did, after all…
Solar Power? weeeelllll… maybe. If we are smart, and somehow make it a priority in this country, probably. About as likely as coming up with a cogent and reality-based energy policy tho, as you have noted many times… Still, if AZ, say, was to require solar installation on every new construction to provide half the power required by that building, or something intelligent [but Un-American] like that…? Hey- stranger things have happened!
But, until hell freezes over:
I’d go for JNJ and KO [get in before that split, folks], but someone else already sort of said them. They will still be going strong in 20 years, and the compounded div return should be what…maybe 25% annual on initial cost, by then?
But, MY top choice is another of your favorites- SLB. Oil in all its uglies will still be with us in 20 years, even as we pass the Peak and take that ride down the greasy slide on the other side [uhh...sorry.] Finding it just gets harder and more expensive. SLB will be doing just fine in 20 years. [NOV, too, I betcha.]
And speaking of gambles:
I’d be willing to make bet on e-cars, but which one? What kind? I have already made a small wager on a potential e-car battery manufacturer- the old fave, AONE, bravely headed off now into “grid-scale energy storage” solutions, until those e-cars catch up. At 90 cents, it is either a prime [but cheap] bankruptcy candidate or else a sure many-bagger winner. Roll ‘em!
Thanks as always Jim.
Great article Jim (whether or not you are right). I was just about to pull this one from my watch list. I had forgotten about Total’s buy in on SPWR. Even if this is just PR for Total, money is money.
I’d go for something more cutting edge, like Radio Shack…just kidding. I think the greatest advances over the next two decades will be in medical technology, so I’d look for a biotech with great prospects and a visionary at the helm. Maybe something like Celgene.
Very important article. 30 years ago I worked for Chevron Oil and when I left I got about 100 shares of common stock from my vested interest in their employee stock plan. Put dividends into reinvestment plan. I have gifted some shares and now have over 1500 shares. I didn’t hit a home run, but it shows the power of dividends and reinvestment.
For my grandson, now 18 months, I have started a trust with high quality, dividend paying stocks. The only additional thing to remember is to diversify into a number of stocks like JNJ, PG, CVX, CL, etc. Most important thing is to “save”. Without saving you have nothing to invest.
Good article.
Solar has crashed because the curtain has been pulled back and it’s really just a scam for corporate welfare, similar to ethanol. Solyndra was the straw that broke the camel’s back.
When you strip solar of government subsidies, it’s a novelty more than anything else.
I just recently bought some TOTAL. I’m hoping for substantial profits in much less than 20 years and the 6% dividend will give me a comfortable cushion while I wait.
Water. Solar is renewable, but water is a Giffen good. Since technologies are unpredictable, and because this is trade in a basic human need, CFWAX, the socially responsible water portfolio.