Best Long-Term Stocks of 2023

Diageo

If the last few years have made you reach for a stiff drink, it is certainly understandable—and very likely that you have consumed a Diageo product. That’s because the London-based spirits company has a massive portfolio of brands you probably recognize, from Tanqueray gin to Guinness beer to Johnnie Walker Scotch whisky and hundreds more. But after a pandemic-related boom, when we all drowned our sorrows in isolation, Diageo’s share price has come back to Earth—which means a more attractive entry point for value-minded investors. “We think investors are being overly cautious in the near term, and are overlooking [what] is a very attractive business and category over the long term,” says Schwab’s McMahon. The unmatched geographical reach (sales in more than 180 countries) and distribution channels enable Diageo to capitalize on trends in a way other companies can’t, notes McMahon. Particularly poised for growth are categories like premium tequila—the firm owns the Don Julio and Casamigos brands—and regions like China and India. Of special interest is the dividend. Diageo has proved itself a reliable payer—the current yield is 2.15%—and has the ability to grow that payout even further, says McMahon. Recent flat price performance may be due to unfair comparison to huge pandemic sales, and looming concerns about recession fears and the financial health of the U.S. consumer. The stock has yet to regain its peak from the end of 2021, for instance. “The analyst community is waiting to see the next earnings report before they get too excited about the stock, but we see a lot of meaningful upside on shares,” says McMahon. “This is a premium franchise.”

LVMH Moët Hennessy Louis Vuitton

For truly long-term investors, you can’t find a better approach than what Eaton Vance’s Dyer calls the “Robinson Crusoe” philosophy. Named after the famous shipwrecked protagonist of the Daniel Defoe novel, “We ask our team members to imagine they are Robinson Crusoe and stuck on a desert island for years,” he says. “If all your personal wealth was in one stock and you can’t trade it—which stock would you want to invest in?” For Dyer right now, the answer to that question is a very well-known name: LVMH Moët Hennessy Louis Vuitton, global purveyor of luxury goods. In addition to its namesake luggage and liquor lines, LVMH’s portfolio includes fashion brands like Christian Dior, Fendi and Givenchy, watchmakers TAG Heuer and Hublot—and, as of 2021, iconic jeweler Tiffany & Co. Since the company is listed in Paris, American individual investors can’t buy shares in the usual fashion, but they can purchase American depositary receipts (ADRs) in the over-the-counter market, via the ticker LVMUY. “We look for companies that have a strong tailwind of growth, generate high returns on capital, have high gross margins, produce lots of cash flow they can reinvest, have a strong balance sheet to see them through any crisis, have the pricing power to offset inflation, and have a management team you can trust as good stewards of capital,” says Dyer. “LVMH ticks the boxes on all those characteristics.” What distinguishes the company is the “aspirational” nature of its portfolio, the kind of “highly valued brands people are willing to pay up for,” Dyer adds. Like the wares it sells, the stock is “not cheap,” Dyer admits. And with such consumer-reliant companies, there are always concerns about cyclicality—in particular with regards to slowing growth numbers in the U.S., since the waves of stimulus money have receded. But resilient numbers from Europe, along with big potential in China, should bode well for the company going forward. In desert island terms, that means our friend Mr. Crusoe should emerge after 10 years with an investment that has appreciated “double digits” every year, says Dyer. Not bad for a shipwrecked investor.

First Citizens Bancshares

Investors were rattled this year with the troubles of Silicon Valley Bank, which put a number of regional banks under pressure. But before you stay away from financials altogether, consider the “biggest and best bank no one has heard of,” according to Oakmark legend Bill Nygren. In fact First Citizens was the institution brought in to buy SVB’s business—part of a deal blessed by the FDIC—to absorb its assets and liabilities, steady the sector, and make sure the contagion didn’t spread. “Ask any investor about great CEOs in banking, and they will probably name Jamie Dimon at JPMorgan Chase, or Brian Moynihan at Bank of America, or Charles Scharf at Wells Fargo,” says Nygren. “Almost no one would say Frank Holding Jr.—and yet the performance of First Citizens stock since he took over as CEO is the strongest of any publicly-held bank.” In fact following the SVB deal, that share price has jumped into the 1200s, after spending much of last year around 800, Nygren notes. That might make many investors worried that they have already missed the boat—but he still sees the bank as trading at a significant discount to its intrinsic value, with yet more room to run. Part of the reason is exactly what First Citizens demonstrated in the SVB deal: It has become a specialist in taking over banks in distress and incorporating their assets. As such it has earned something of a special relationship with the FDIC, which puts it in favored positions at auctions. “The FDIC knows it’s not their first rodeo, since they have done it so many times before,” says Nygren. Something to consider for value-conscious investors: The bank’s B-shares (FCNCB) sell at around a 10% discount to the A-shares, mainly because they are not traded as much and present more liquidity concerns. But not only do they sell more cheaply, they are actually “supervoting” shares, Nygren notes. “We think for investors who want to buy and just put them away for the long term, those shares are an even better value.”

Generac

Take a look out the window these days, and extreme weather seems to be our new normal, with “once-in-a-generation” events happening all the time. For most firms, the damage of unpredictable, frequent storms is obviously a huge negative. But for a handful of companies, this uncertainty actually plays in their favor. Exhibit A: Generac, the primary force in the backup generator business. If outages are becoming commonplace, and power companies and governments aren’t investing enough to prevent them, it stands to reason that both homeowners and businesses will need to set up their own sources of reliable power. “With so many stocks, you worry about the world changing around you,” says Ariel’s Kuhrt. “This is one of those rare stocks that as the world becomes more chaotic, this business actually benefits.” In terms of valuation, its stock chart is an odd one: A big pandemic-era run-up, which saw any stock tangentially related to “green power” go through the roof. It has since settled down into a more sober reflection of its core businesses, and so appeals to value-minded Ariel managers. Particular growth areas for the company: Commercial businesses, which need backup power sources just as much as residential clients; and regions of the country that are starting to become more impacted by extreme weather, where market penetration isn’t yet high. The growing number of electric vehicles should also play in Generac’s favor, since those car owners will need charging options when outages hit. As does the work-from-home trend, with a greater percentage of the workforce operating out of home offices and relying on consistent power availability. “Extreme weather is becoming a bigger and bigger problem over time,” says Kuhrt. “Meanwhile the nation’s infrastructure for electric power is old, and it will take a long time and tons of capital to get it up to speed. “Just based on their backup generator business alone, the stock should be trading in the low 200s. Add all the other parts of the business”—everything from smart thermostats to battery storage systems and remote monitoring platforms to lawn equipment—“and you get to a price point well above that. We see significant upside here, because they have a lot of irons in the fire.”

Realty Income Corp.

There is no denying that it’s a challenging time in the commercial real-estate business. The pandemic-related work-from-home trend that is hitting office buildings, combined with a continuing campaign of higher interest rates from the Federal Reserve, are putting unique pressures on the property sector. Taking that into account, one smart long-term play is Realty Income, according to Neuberger Berman’s Jones. The $41 billion real-estate investment trust, or REIT, has one of the business’ more conservative reputations, thanks to its “net lease” focus. “Net lease REITs own real-estate assets leased to tenants whereby the tenant is responsible for all property operating expenses and taxes,” says Jones. “The company’s cash flows are very defensive, and it has a very diversified portfolio.” Its income stream derives from a massive portfolio of 12,400 properties, focused on long-term commercial tenants. What income-oriented investors really love: The REIT structure, which requires them to distribute 90% of taxable income to shareholders in the form of dividends. The result is a payout north of 5%, and a dividend that has increased 120 times since the stock’s public listing in 1994. In fact it was added to the S&P 500’s Dividend Aristocrat index in 2020 for having maintained or boosted its dividend for decades. With the U.S. economic outlook uncertain, Jones sees real growth opportunities abroad: “The opportunity to grow their European business is substantial, because the net lease financing industry is at an earlier stage of development in Europe relative to the U.S.,” he says. The stock has hardly set the market on fire, with its share price essentially flat over the last five years. But combined with a real estate landscape that has damaged more highly leveraged competitors, and a size advantage that makes it an attractive potential merger partner, Jones sums up Realty Income’s prospects with one word: “Compelling.”

How we picked

To find the best long-term stocks we polled experienced fund managers at major mutual-fund companies. We asked representatives of each portfolio to recommend one stock they felt had a solid fundamentals, an attractive valuation, and high potential for growth. We favored companies with strong brands and economic moats, the size to weather coming storms, and whose stock price is likely to appreciate significantly over the long-term. Forward price-to-earnings ratios represent estimated earnings over the next 12 months. All share prices are as of July 13, 2023. G ot a money question? Let Buy Side find the answer. Email money@buysidewsj.com .