It’s an exciting time to invest in stocks. But stock investing is no game, because otherwise you’d be gambling with your precious savings. Even though inflation is high, and cash is not worth as much as a year ago, cash is still king in a bear market. You can deploy excess cash to work for you, as stock valuations slide.
So, what stocks should you hold in your portfolio? We can learn from one of the greatest investors of our time. Here’s a famous quote from none other than Warren Buffett:
“If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.”
Actually, let’s up the game and discuss three stocks to hold for the next 20 years.
Constellation Software stock
Constellation Software (TSX:CSU) has made countless mergers and acquisitions over the years and created tremendous shareholder value. It is easily one of the top stocks on the TSX. It has turned early investors into a millionaire! Specifically, a $10,000 initial investment has transformed into over $1.4 million.
CSU Total Return Level data by YCharts
Its gross profit margin remains super high at approximately 89%. Its operating margin is 16.9%, a small improvement from 16.7% in 2019 before the pandemic. It generates over $1 billion in free cash flow and continues to focus on growth, which is why its dividend yield is puny at 0.28%.
The top tech stock has held up very well versus the tech sector because it is highly profitable, generates tonnes of free cash flow, and has a strong track record of growth. This market downturn pressured the stock to only about 38 times forward earnings, which is reasonably valued based on its long-term normal valuation.
In a normal market though, this would be considered a discount for the quality tech name. Analysts think the stock is discounted by about 26% at about $1,931 per share.
National Bank of Canada stock
As the smallest bank of the Big Six Canadian bank stocks, National Bank of Canada (TSX:NA) has the small player advantage in that its profits are smaller than its larger peers, making it relatively easier to grow the absolute numbers. Here’s how an initial $10,000 investment in the bank has beaten the Canadian bank sector using BMO Equal Weight Banks Index ETF as a proxy.
NA and ZEB Total Return Level data by YCharts
National Bank of Canada is the most Canadian bank among the Big Six since it generates about 80% of its revenues domestically. Specifically, it makes 55% of its revenues in Quebec. So, the economic health of Canada and Quebec will directly impact its bottom line.
The bank makes over $3 billion of net income annually. Currently, at about $86 per share, it’s undervalued by about 17% to its normal valuation and offers a nice dividend yield of 4.3%.
Fortis stock
Investors can also start looking at utilities as they are a part of the latest selloffs. High inflation doesn’t bode well for Fortis (TSX:FTS)(NYSE:FTS) because it’s considered a slow-growth business. Rising interest rates also pressure the stock because utilities inherently have high debt levels.
However, the solid dividend stock will experience support at some point, because of the predictability of its regulated business. In a normal market environment, I’d ask for a 4% yield from the stock. At writing, it yields almost 4.3% as it just raised its dividend by 5.6%.
Its dividend increases have been like clockwork. This last hike occurred for the 49th consecutive year. From a long-term perspective, the stock is becoming compelling. But in today’s environment, it would probably experience more pain.
Interested investors that are risk averse may consider buying some at about $51 and more at about $48.
Holding this diversified group of stocks should provide some resiliency against today’s market downturn. Over the next 20 years, they can make you much wealthier.
