Compounding is one of the most potent forces in investing. One way to take advantage is to buy the best forever stocks that will grow sales and earnings for decades. Typically, these stocks have wide moats and durable brands that protect them against competition. Also, they have a proven record of sustaining their profits through economic cycles, outperforming the market.
So, how do you identify the best forever stocks to buy? First, they sell everyday products or services with minimal disruption risks. While technology might improve their operations, it doesn’t pose risks of obsoleting their products. For instance, confectioners delight their customers with chocolates. AI won’t change customers’ preferences for their trusted tasty products.
Secondly, these stocks benefit from the Lindy effect, a principle popularized by statistician Nicholas Taleb. It states that the longer a product has been in use, the longer its future life expectancy. Usually, top forever stocks sell products that have been in the market for decades. This longevity assists in capturing consumer mind share and developing crucial business relationships.
Finally, these long-term investment stocks have impenetrable moats making them profit machines with robust cash flows. Like clockwork, they reinvest their surplus cash flows into research, talent, supply chains, and market distribution. With each investment, they gradually strengthen their product quality, enhance their network effects and boost economies of scale. As a result, they end up in monopolies or duopolies with limited competition to disrupt their businesses.
So, here are some blue-chip forever stocks that have endured recessions, wars, and political turmoil. Due to their utility-like products and strong customer loyalty, they will likely thrive for decades.
Hershey (HSY)
If you are a chocolate fan, you have certainly come across Hershey’s (NYSE:HSY) products. Alongside Mars, these two giants dominate the North American confectionery market. Since its founding in 1927, Hershey has delighted its customers with products like Hershey’s, Reese’s, and Kisses.
Whether in an economic crisis or pandemic, consumers always crave a taste of their favorite chocolate bars. And every Halloween season, kids engage in the curious hunt for tasty treats creating a lasting brand connection. Consumers’ strong affinity for Hershey’s chocolate products and other snacks has made it a staple in most households.
These consumer habits have driven revenue growth for decades allowing the company to reinvest and bring new and better products to market. In the U.S. market, the company is the leader in market share at 33.5%. Also, it has recently diversified into cheese puffs, pretzels, and popcorn through several acquisitions.
After years of consistent growth, Hershey has grown into a behemoth with annual revenues of $10.4 billion. In the last five years, revenues increased at a compounded annual growth rate (CAGR) of 7%. Meanwhile, diluted EPS grew at a 15.82% CAGR in the previous three years.
Despite its size, Hershey is still one of the top high-potential forever stocks to buy. Notably, Hershey is still growing sales volume organically. While other packaged food companies relied on price increases for growth in the last quarter as volumes declined, Hershey bucked the trend. Management announced organic volume growth of 3.3%.
Yes, chocolate seems boring compared to tech stocks in AI or the cloud. But sometimes, in investing, keeping it simple wins. People aren’t going to stop consuming chocolate. That’s why it has been one of the best forever stocks returning 178% in the last five years.
Waste Management (WM)
Garbage collection is an essential utility that consumers and governments always need. And with the proliferation of consumerism and e-commerce, the amount of waste has only increased. Waste Management (NYSE:WM) serves the waste collection, disposal, and recycling market, making it one of the best forever stocks to buy now.
The Houston, Texas-based company is the largest garbage collection company in America. It owns or operates over 259 landfill sites in U.S. and Canada. The company has expanded its presence in North America through bolt-on acquisitions. For instance, its $4.6 billion acquisition of Advanced Disposal in 2020 added 41 landfills and 3 million customers.
So, why is Waste Management a forever stock to buy? First, the numerous regulatory hurdles make trash hauling a defensible business with limited competition. Obtaining permits and environmental approvals for a new landfill takes a lot of work. After all, nobody wants a landfill in their backyard. Due to these regulatory and political obstacles, Waste Management’s existing landfills are an irreplaceable asset.
Secondly, it has strong pricing power because 60% of its contracts have provisions for price increases. Thirdly, the company owns its landfills. 70% of the waste it collects is disposed of on its landfill sites. As a result of this vertical integration, the company derives higher operating and profit margins.
Given the essential nature of garbage collection and disposal, the substantial barriers to entry, and higher profit margins, WM stock is one of the top forever stocks to buy. And TipRanks analysts agree with an average price target of $174.78.
PepsiCo (PEP)
Snacks are an indispensable part of the family diet. No other company dominates the category like PepsiCo (NASDAQ:PEP). In FY2022, its snacks business accounted for 58% of revenues. Complementing the snacks business is an equally robust global beverage business.
Since it dominates the convenience foods category, PepsiCo’s snacks business is a stable growth driver. It is the market leader and brought in $50 billion in revenues in FY2022. The business includes brands such as Lay’s, Doritos, Tostitos, Ruffles, Cheetos Aunt Jemima, Cap’n Crunch, and Quaker Oatmeal.
In terms of the carbonated soft drink business, it’s the second largest player behind Coca-Cola (NYSE:KO). Essentially, these two operate as a duopoly. And although PepsiCo is the smaller player, it has led in many markets powered by drinks such as Pepsi, Mountain Dew, and Gatorade.
Despite the strength of its brands and the breadth of its portfolio, PepsiCo is accelerating investments in its brands. As management highlighted in CAGNY 2023 conference, they have increased advertising and marketing by 24% in the last four years. Additionally, they have increased capital investment in capacity and supply chain, digital solutions, and go-to-market strategies.
Due to these investments, PepsiCo has compounded revenues at 8.9% over the last three years. First quarter 2023 results were equally impressive, showing 14.3% organic revenue growth. Frito Lay North America had an astounding performance registering $5.5 billion in sales, a 16% YOY organic growth. It’s no surprise that analysts consider PepsiCo as one of the best forever stocks to buy.
PepsiCo is a meaty forever business due to its number one position in snacks and duopoly in soft drinks. Besides, its global scale allows it to wring out numerous operating efficiencies. Finally, as my colleague Will Ashworth recently noted, it’s a dividend aristocrat that will keep rewarding shareholders from its increasing cash flows.
On the date of publication, Charles Munyi did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.