This post title might seem like clickbait.
But I am merely taking a leaf out of Morningstar, which publishes an annual list of great companies to own. They’ve just released their 2024 edition.
You can check out the full list here.
With more than 160 companies listed, you might feel lost trying to identify the best ones from the list.
Before diving into the list, it would be great to understand how these companies make the cut, so we can proceed to filter out the real cream of the crop.
Methodology
Long-term success and an economic moat always go hand in hand. Thus it isn’t a surprise that most of the companies mentioned in the list hold an economic moat. Traits or characteristics that give a company an economic moat can range from Network Effect, Intangible Assets, Cost Advantage, Switching Costs and Efficient Scale. Companies that have a mixture or higher degree of the mentioned traits will have a wider economic moat.
On top of the business model, the quality of the management – such as their approach to capital allocation, investment strategy, balance sheet management, policies on dividend and share buyback – can also make or break a company.
Lastly, Morningstar introduces the concept of low or medium fair value uncertainty. If a company has lower uncertainty regarding its future cash flows, then the level of certainty of its fair value estimate is therefore, higher.
In a nutshell, great businesses are those run by prudent management with a high degree of certainty in future free cash flow.
With that taken care of, let’s jump into 7 stocks that I think are truly in a class of their own, and is a no-brainer long term play.
Microsoft Corp (NASDAQ: MSFT)
The most diversified and robust among the Magnificent 7 cohort. Yes it might not have rallied as much as NVIDIA Corp (NASDAQ: NVDA), but a 2-bagger return over the past 5 years proves how solid the company is.
The Microsoft I first laid eyes on, was an all-rounder with equal weightage for Productivity and Business Processes, Intelligent Cloud and More Personal Computing. Since then, the company has seen its Intelligent Cloud revenue growing to contribute more than 40% of its total revenue.
Microsoft’s suite of products has become increasingly entrenched to daily operations, evolving from the traditional Office suite to include platforms like Teams.
I don’t foresee a change in how work is going to be done, even though Google’s products offer a solid alternative. Given its sheer size and a track record of appointing the right management team since Bill Gates, it would be a fool’s game to bet against Microsoft.
Linde PLC (NASDAQ: LIN)
Long-term success signifies an evergreen business model. Over the last decade, we’ve seen businesses rise and fall. We’ve also seen a change of guard in the internet space, from the first movers to the current leaders.
But some businesses will remain intact ever for the next 50-100 years. The business in supplying industrial gases is one that I foresee to be evergreen. The largest of them all, is none other than Linde.
Linde serves a wide array of customers, from the miners, to the semiconductor players, and also the food manufacturers and even the healthcare providers. A Coke or beer just won’t taste right without carbon dioxide giving it the fizzy sensation, and mining and semiconductor activities would struggle to run as per normal without certain gas requirements. Some clients even request Linde to set up industrial gas plants next to their factories for continuous supply.
And due to the capex intensive nature of such businesses, it is quite certain that no one in their right mind would consider starting an industrial gas factory from scratch.
Caterpillar Inc. (NYSE: CAT)
Remember, during the gold rush, not every gold miner struck gold – but the suppliers of pick and shovel certainly did, thanks to the soaring demand for tools.
Over the years, these ‘picks and shovels’ underwent industrialisation evolution, transforming into pickups, excavators and bulldozers. This is where Caterpillar operates.
Caterpillar is one of the world’s largest heavy machinery companies, servicing the mining, construction and even farming industries. Although there are a handful of similar companies operating in the same sector, Caterpillar manage to punch above its weight, commanding better margins and superior total shareholder returns over the long term.
With a trailing P/E of 18x, Caterpillar looks reasonably priced, albeit the fact that it remains susceptible to the cyclicality of the sectors it serves. But I am still quite confident that mining and construction will continue to play a pivotal role in the growth and expansion of our civilisation.
If you feel that Caterpillar’s valuation is on the higher side, you could consider Deere & Co (NYSE: DE) which is on the list as well.
Visa Inc. (NYSE: V)
Pull out your debit or credit cards – chances are, you’ll see either Visa or Mastercard (NYSE: MA).
A 100 years ago, no one would have thought that payment settlement and collection for non-cash terms have evolved. Today, settling transactions without cash has been refined to the point where all it takes is just a swipe or a tap (or wave!).
The convenience of cashless payments is just the tip of the iceberg, accessible to almost anyone who qualifies based on their earnings or creditworthiness. The global network for payment processing has grown so vast and ingrained in our lives that I don’t think I can live without the seamless process of swiping or waving my smartphone at the payment terminal. I would lament and even detest the time spent digging out notes and coins.
This evolution has also allowed and rationalised the prudent use of debt (or “future money”) to fund present day consumption and growth.
Being easily one of the best business models with a duopoly running everything. Whether if credit cards or its successor arises, so long as Visa leads and innovates on its stronghold, the company will always play a part in how payment is settled now and forever.
Taiwan Semiconductor Manufacturing Co Ltd (NYSE: TSM)
Another sector that I am pretty certain would remain evergreen is the semiconductor industry.
Looking at the semiconductor value stream, it is clear that the top-to-midstream players dictate most of the direction and margins of the business.
While news headline often focus on the rampant bull run or steep correction of NVIDIA Corp (NASDAQ: NVDA), another perspective to invest in is the infrastructure playbook of the chip fabrication business.
With over 60+% market share of the fabbing business, and no conflicts of interest with its fabless clients, it’s no wonder TSMC manages to carve out a niche.
Setting up a fab in a rapidly evolving technological space requires not only client exposure but also absolute trust in terms of committed volumes from its clients to run its fab as efficient as possible.
It will be hard to fathom a random new player suddenly displacing TSMC in the next 5 years.
Johnson & Johnson (NYSE: JNJ)
Johnson & Johnson (J&J) is a multinational healthcare conglomerate with a proven track record of delivering sustainable growth and shareholder value. Although there are so many listed pharmaceutical companies, J&J has a few tricks up its sleeves that makes it one of the best in its field.
Firstly, J&J’s diversified business model provides a significant advantage. The company operates in three core segments: Pharmaceuticals, Medical Devices, and Consumer Health. This diversification mitigates risks associated with any single segment and ensures stable revenue streams. The Pharmaceuticals segment, in particular, has been a major growth driver, fueled by innovative drug pipelines and strong market positions in key therapeutic areas.
J&J’s financial performance has also been consistently strong, characterised by steady revenue growth, robust profitability, and a healthy balance sheet. The company’s strong cash flow generation allows it to invest in research and development, strategic acquisitions, and shareholder returns.
It might not have been in the limelight for blockbuster weight-loss drugs, but the drugs and med tech solutions that it is currently offering, are not just fads.
Alphabet Inc. (NASDAQ: GOOGL)
Alphabet Inc, Google’s parent company, might be in for a bumpy ride recently due to increased antitrust probes, but I find myself getting more entrenched in the company’s suite of products.
I am still stubbornly on an Android phone, count myself as a daily active user of YouTube, and sneak in some Chrome usage on my MacOS laptop from time to time.
While movie production companies are fighting each other to the tooth on which subscriber to onboard, anyone can watch YouTube. Plus, the amount of quality content that one can get from YouTube way surpasses National Geographic or Discovery channel.
There is still the AI and cloud computing catalyst in play that could pivot the company from just being a pure-play online advertising company. Don’t forget it also owns Waymo, one of the few running and operating robotaxi companies.
My type of Magnificent Seven
I think my list of “Magnificent Seven” is more robust than the widely accepted original.
Firstly, it’s not just pure tech, and secondly, we all have our eyes on some of the underperforming Mag 7 ever since the term was coined.
My rationale in picking my seven stocks isn’t purely about headline appeal; it also takes into account how these companies can continue to grow.
I’m fortunate that these 7 companies that I am quite confident in happens to be on Morningstar’s list of best stock to own.
Rather than looking for ideas, I am more comforted by the vindication and validation that my methodology has identified great businesses that fit the bill of long-term, buy-and-hold investments.
There are definitely many more quality companies within the list of 160 companies. But if I were to restart my portfolio from scratch today, these will definitely be my no-brainer foundation stocks – not just for 2024!
p.s. if you want to learn how to analyse and find the best stocks to buy, Alvin shares our strategy at this live webinar.