The title of this article is slightly deceiving. No stock is safe, especially in the near-term. The volatility of a stock is pretty much a crap shoot from day-to-day and month-to-month.
In the near term stocks are risky, but long term they are a safe bet
Stocks are inherently risky when you use them to trade in and out. In the short-term, stocks move based on factors like momentum/volume, institutional trading, the economy, the news, indexation, and an array of other factors.
However, over the long-term, stocks tend to trade in line with their operational and financial performance. If a company can grow its earnings per share by a compounded growth rate of 15% over a 10-year period, chances are very likely that it will have similar returns.
The safest thing an investor can do is to buy stocks in high quality businesses and hold them for the long term. These are businesses with strong balance sheets, attractive product/services, prudent managers, and stable per share cash flow and earnings growth.
A Canadian stock to hold for a lifetime
One example of this is Constellation Software (TSX:CSU). The company has delivered a 1,826% total return over the decade. That equates to a 34.4% compounded annual return. It has grown earnings and free cash flow by a respective 16% and 22% compound annual rate over that period.
Constellation has built an empire of niche software businesses. Given the vital services they provide to their customers, these businesses tend to be economically resilient through market cycles. Since Constellation purchases businesses with a very high hurdle rate, its investments tend to yield a significant amount of excess cash.
The company takes that cash and reinvests it to buy more businesses. It has a true formula to steadily compound capital. This Canadian stock has almost always been pricey. Many potential investors have perceived that as risky. However, the stock is pricey, because the company is of high quality and the valuation has been justified over the years.
If you believe it can continue to compound earnings and cash flows at a high-teens to low-20% growth rate, the current $3,180 price tag may not be so bad. If the stock pulls back on short-term reasons, it would be an even better buy.
An engineering stock building lifetime assets
Another safe stock to own over the years has been WSP Global (TSX:WSP). WSP has grown to become one of the largest consulting, engineering, and design firms in the world.
Over the decade, it has grown earnings per share and free cash flows by a respective 17% and 16.5% compounded annual growth rates (CAGRs). The stock has performed even better. It is up 646% over the decade (a 22% CAGR).
Like Constellation, WSP has grown by consolidating a widely fragmented sector. It now has wide geographic exposure, a broad mix of clients, and a diverse portfolio of services.
Steady population growth requires infrastructure to be expanded and updated constantly. Challenges such as changing weather patterns will require complex and demanding solutions. That bodes very well for a diversified firm like WSP.
Like Constellation, WSP has always been expensive. However, given its market-leading platform, it likely deserves the elevated value. Any fair pullback is a great time to add a safe, quality business like WSP.
