One of the hallmarks of a robust long-term investing strategy is to build and maintain a diversified portfolio of great companies with strong underlying businesses. But, let’s say for a moment you could only own one stock for the next several years. What stock would you choose? In this segment of Backstage Pass, recorded on Nov. 3, Fool.com contributors Trevor Jennewine and Brian Withers discuss this question, and Fool.com contributor Rachel Warren narrows it down to one unstoppable stock.
Trevor Jennewine: So, we’ve already been talking about inflation quite a bit and we’re not quite done yet. Since the beginning of the pandemic, Congress and the Federal Reserve have taken different steps to stimulate the economy and stave off or shorten a recession, boost consumer spending. Collectively, Congress has authorized several rounds to the stimulus payments and the Federal Reserve has been buying $120 billion in government-backed bonds, which has been a combination of mortgage back securities and treasury debt, $120 billion each month.
Those measures have injected almost $9 trillion into the US economy. That’s one of the reasons that Wall Street is concerned about inflation. The pandemic caused business closures and that created bottlenecks in supply chains, and so you have reduced economic output, at the same time that you are funneling money into the economy. You end up with a situation where you have lots of money chasing fewer goods. Based on supply and demand, that’s going to cause prices to go up.
Today, the Federal Reserve ended their meeting, and I think there are a couple of big takeaways. They are going to start scaling back their buyback plan for those government-backed bonds and are going to be cutting back by about $15 billion per month with the goal of stopping by June 2022.
Analysts expect the Fed to start raising interest rates once that process is complete, but they did not change interest rates today. Then I think investors even more interested in the Fed’s comments on inflation. The chairman, Jerome Powell said that he believes that the currently elevated inflation rates are transitory, meaning that the factors that are causing them, like the supply chain, bottlenecks, are going to be resolved in the not too distant future. That doesn’t mean by the end of the year. That could go on through 2022, even longer, but they do think that it’s transitory, so I think that is good news. I think after the Fed made those statements, the market bounced higher.
I gave all of those details to make a point. That is that the macroeconomic environment is very complicated right now. I think we could probably find very intelligent investors or economists who would take completely different sides on what the market is going to do in the near term. Let’s zoom out again and look at things over the long term. This is similar to the first question, but a little bit different. If you could only own one stock for the next five or 10 years, what would it be and why? If there’s any viewers who want to chime in on Slido, feel free to do that. Rachel, let’s start with you.
Rachel Warren: This is a tough one to pick just one [laughs] stock, but I was thinking about this. I think for me, the first company that came to mind, and this one, I am a shareowner of, is Amazon (NASDAQ:AMZN). Now, it’s no secret the company recently had a bit of a bumpy quarter and shares reacted accordingly. We were just talking about you’ve got these high-growth stocks, investors are a little nervous, and that’s evidenced in shares moving around, although the company has regained ground in the last couple days and I believe shares were trading up today last I checked.
Just as a refresher though, in the most recent quarter, the company’s net sales grew 15% year-over-year, even though operating income and net income decreased. Those were some points that were a concern for investors. But the company’s cloud business, Amazon Web Services, growth in that segment accelerated 39% year-over-year.
Again, this is just one quarter out of many quarters that Amazon has reported. For me, the thing that I love about Amazon, also the reason I’m a shareowner and plan to continue to be for a very long time, is I love the diversity of its business. I think one of the things that people think of with Amazon is, of course, e-commerce, the king of e-commerce. It’s no secret, this is a multi-billion-dollar industry. The U.S. e-commerce market alone is supposed to hit a valuation a little bit shy of $1 trillion this year. Amazon controls the leading share of the U.S. e-commerce market, and not to mention its best footprint in the global e-commerce market.
Then you think about its cloud business. Amazon Web Services is the leading cloud provider in the world for cloud infrastructure. It outpaces that of Microsoft and Google by then some and it continues to grow that market share. You’ve got these two credibly high-growth industries that Amazon essentially dominates.
It’s got a footprint in entertainment with Amazon Prime and other highly lucrative industries that it’s found vast success in. Then even these other areas where it has a smaller but growing footprints, such as healthcare and grocery. I think that this is a company that it’s easy to get lost in a quarter or two. I think it makes sense that you see perhaps some slowed growth given the supply chain constraints that are going on right now, and also compare year-over-year to some of the insane growth we were seeing in the earlier days of the pandemic.
But if again, you look at the bigger picture, you look at Amazon’s history as a whole, over the past 10 years alone, the company has increased its net income by over 3,000%, and its revenue by over 700%. The stock over the last decade has delivered a total return of more than 1,400%. Again, looking at the big picture of what a stock like this can do over a long period of time, throughout the ups and downs of the market. I firmly believe that Amazon can continue to do that. That’s my pick, if I could just pick one company to hold in the next several years.
Brian Withers: That’s a really good pick I think, Rachel. One of the things that I’m always impressed with Amazon, is just their ability to innovate or do the hard things that need to be done.
Five years ago, you would never have thought Amazon having the fulfillment network it has today, which is almost as big as UPS‘s, they own planes, they own trucks. I see the Amazon truck come by two or three times a day now. It’s just amazing their ability that if they go after something to get it done. I think that’s a fantastic pick.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.