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2 Stocks You Can Buy and Hold Forever

2 Stocks You Can Buy and Hold Forever
March 24
12:06 2017

(Fool) – If you want an investment time horizon that’s forever, it will drastically change the way you view the businesses and stocks you buy. Throw out those fresh IPO tech stocks, turnaround stories, and value plays. Instead, look for great businesses in industries that will be nearly impossible to disrupt for decades.

With that kind of mind-set, two companies pop out as the kinds of businesses you’ll want to own for your lifetime and well beyond: Canadian National Railway (NYSE:CNI) and Anheuser-Busch InBev (NYSE:BUD). Here’s why they fit the bill better than almost any other stock.

An industry that just keeps chugging along
As much as we have made incredible advancements in logistics and transportation over the years, there is one undeniable fact: When you need to move large amounts of goods, rail transportation remains the most effective means to do that. The ability to move bulk goods, commodities, and intermodal containerships over long distances at relatively low cost is going to make it incredibly difficult for any other mode of transportation to compete with the cost effectiveness of freight rail transport.

What also makes rail an attractive investment for a very long investment time horizon is that it is extremely difficult to disrupt the existing companies in the industry. The billions upon billions of dollars it takes to build out an adequate network of rail makes it close to impossible for a new rail company to set up shop, especially when the railroad network in North America is already well established. That means that the existing companies are well entrenched and probably aren’t going anywhere anytime soon.

When making an investment in rail over the long haul, you don’t want to focus too much on cyclical trends or turnaround stories. Rather, the big focus should be on the business that has a robust network and runs that network most efficiently. Using that as a jumping-off point, then Canadian National Railways is hard to beat. Canadian National has the only rail network in North America that connects to ports on the Atlantic, Pacific, and U.S. Gulf Coast. It also happens to consistently outperform its peers in terms of getting more revenue per ton mile shipped and keeping its operating ratio — rail industry speak for cost of goods sold — the lowest in the business.

Of course, all of these only benefit an investor if the company can deliver those results to the bottom line, and Canadian National doesn’t disappoint in this regard. For close to two decades, it has continually improved its rates of return for investors while steadily growing its dividend and buying back gobs of stock.

With shares of Canadian National trading at an enterprise value-to-EBITDA ratio of 12.5 times, the stock isn’t a screaming bargain and is well above its historical valuation over the past 20 years. Buying shares today is by no means a bad idea since the company has shown to deliver year in, year out. Those with a little more patience, though, might get a better deal in the future. With that said, there is no denying that Canadian National has the kind of traits you want from a buy-and-hold-forever kind of company.

Drink to this
When you sit and think about it, Anheuser-Busch InBev has quite possibly the most undisruptable business out there. Beer and alcohol consumption has been around for thousands of years, and the profit margins for fermented barley and hops are off the charts. Over the past 12 months, Anheuser-Busch InBev has generated EBITDA margins of 35% on selling a wide variety of beers — from its core global brands of Budweiser, Stella Artois, and Corona to a range of upscale products tailored to regional markets.

It’s clear that the company swung for the fences when it acquired SABMiller last year, bringing together two of the world’s largest brewers. Granted, the company did need to shed some brands to make the transaction happen and took on an incredible amount of debt to facilitate the deal, but the the global footprint and its suite of brands are unparalleled. Of the top 10 selling beers in the world, Anheuser-Busch’s beers rank at 3, 4, 5, 8, and 9. With the principal ingredients for beer more or less the same, bringing these brands all under one roof is providing Anheuser-Busch with an opportunity to save about $2.8 billion in costs.

A cheap price for a quality capital allocator
The oil refining business has been anything but good lately. Throughout 2016, rising crude prices and high costs for ethanol credits to comply with the U.S. Environmental Protection Agency’s renewable fuel standards cut into refiners margins. Unfortunately, that situation hasn’t improved much, as high levels of refined product inventory are keeping gasoline and diesel prices lower. As a result, shares of HollyFrontier have been hit with a few body blows and are now down 23% over the past year.

It’s true that the oil refining business is cyclical, but there are two reasons that make HollyFrontier rise above the fray: its most recent acquisition and its conservative management team.

The cyclical nature of the refining business means that management teams need to take measured steps when growing the business so that they don’t stretch themselves too thinly with capital investments. Too much spending when times are flush can come back and bite a company if the market turns quickly. HollyFrontier’s management has been adept at managing the ups and downs of the cycle. Keeping a very modest balance sheet has provided the firepower to make an acquisition when opportunities present themselves, and avoiding top-of-the-cycle investments has helped the company maintain one of the best returns on invested capital in the business.

This was on full display with its most recent acquisition of a 15,000-barrels-per-day lubricants manufacturing plant from Suncor Energy. Unlike fuels, lubricants is a much higher-margin product and doesn’t fall under the same ethanol compliance regulations. What’s even more encouraging is that the company bought the facility for an annual EBITDA multiple range of 2.9-5.8 times depending on the synergies it can pull. Even if it is on the low end, that is a good deal.

These are moves that make HollyFrontier the kind of stock you want to be on when the industry cycle takes a turn for the worse. Today, HollyFrontier’s stock trades at an enterprise value to EBITDA of seven times and a dividend yield of 4.8%. That EBITDA multiple is good but not great for a cyclical stock, but do keep in mind that this is in the trough of the cycle. So, as the refining market returns to a more normal margin environment, it will look pretty good.

Getting a great grocer at a discount
The past year has been a tough go for Kroger as its stock has declined close to 25%. Much of the losses are related to the fact that the grocery business has been struggling with price deflation. There are also some concerns as the company’s debt levels are getting a bit higher than what we are used to seeing with this grocer — total debt to EBITDA at the end of 2016 was 2.44 times. While that may sound like a palatable figure, keep in mind that the grocery business is notorious for thin margins, and any increase in interest expense is going to be felt on the bottom line.

While these issues may raise an eyebrow, Kroger has earned a reputation as a very solid operator in this competitive industry. Despite the less-than-ideal price deflation environment, Kroger gained market share at its stores for the 12th consecutive year and held net income per share more or less flat for the fiscal year.

It should also be encouraging to investors that Kroger’s management isn’t just resting on its laurels. It sees the changing dynamics of food delivery and online ordering, so it’s using the cash flow machine that is its core supermarket to invest in its digital ordering business. Kroger now has 640 locations from its acquisition of Harris Teeter that can be used to fulfill online orders. The company is now testing last-mile delivery options with ride-sharing companies for delivery. Management even admitted on its most recent call that it is taking a few financial hits with some new initiatives, but it believes that the company needs to make these investments for the long-term strength of the company.

This looks like a company that is going through difficult times, but remains well positioned to grow and return value to shareholders. With an enterprise value-to-EBITDA ratio of seven times and a dividend yield of 1.7%, this seems like an opportune time to make an investment in this temporarily unpopular stock.

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