When long-term investors seek profitable investments, they often hold the goal of achieving generational wealth. This is where stock picking becomes more complicated as one has to find stocks with growth potential that can transcend fads and last for decades.
Fortunately, many stocks of the past have proven their sense of timelessness, and it is likely that some of today's growth stocks will have a similar staying power. Investors may find such longevity in Shopify (SHOP 4.97%), Floor & Decor Holdings (FND -0.21%), and Brookfield Infrastructure Partners (BIP -2.96%).
Shopify
E-commerce has claimed an increasing share of the retail industry for many years, and with that success, enterprises of all sizes have taken an interest. Consequently, many businesses have turned to Shopify's platform.
Although enterprises have numerous choices in this area, they often choose Shopify for its intuitive setup, adaptability, and speed. It also stands out above most of its peers through an extensive ecosystem that supports email marketing, inventory management, payments, and other functions necessary to sustain a business.
Admittedly, it had planned to take that ecosystem into logistics but pulled back amid rising expenses. However, that pivot out of logistics has dramatically improved its finances.
Its revenue in the first nine months of 2023 was $4.9 billion, a yearly increase of 27%. Although Shopify lost $525 million during that time frame, a $1.3 billion impairment charge from the logistics sale explains that loss. And since it earned $718 million in net income in the third quarter, it has likely returned to profitability.
Without profits, it does not have a price-to-earnings (P/E) ratio, but amid a doubling of the stock price this year, the price-to-sales (P/S) ratio has risen to 14. While that is higher than recent levels, it is still well below historical averages. As the company seeks to boost its profitability and support more e-commerce operations, investors should benefit for years to come.
Floor & Decor
The choice of Floor & Decor may surprise some investors given its involvement in the low-growth, hard-flooring business. However, the company has carved out a niche with a unique approach.
Its large showrooms allow it to offer a greater selection than Home Depot, Lowe's, or independent businesses. Also, it deals directly with suppliers, cutting out intermediaries to keep prices low. Moreover, due to its over 200 stores and five design studios in 36 states, it can negotiate significant bulk discounts, creating a virtuous cycle that benefits customers and investors alike.
As the name implies, it also sells décor in the same manner. And since it also offers design, installation, and financing services, it serves as a one-stop shop for hard-flooring and decorating needs.
During the first 39 weeks of fiscal 2023 (ended Sept. 28), revenue of $3.4 billion rose 5% from last year. Nonetheless, sales rose 28% annually in the first three quarters of fiscal 2022, so a sluggish economy affected the company.
Unfortunately, that slowing growth hurt with fast-rising costs and operating expenses. Consequently, net income in the first nine months of 2023 was $209 million, 9% less than the same time last year.
Despite those conditions, the retail stock is up over 30% this year. And considering its P/E ratio rarely falls below 30, a 36 P/E ratio is reasonable for this stock. As the economy recovers, continuing expansion and sales growth should take the company closer to past growth rates, which would bode well for Floor & Decor's long-term investors.
Brookfield Infrastructure Partners
As the name implies, Brookfield earns revenue through its status as one of the largest global-infrastructure owners and operators. Its network moves passengers, water, energy, freight, and data.
Consequently, the company is divided into segments representing utilities, transport, midstream, and data. Thanks to ongoing projects, all segments but midstream saw organic growth in the most recent quarter. Such networks tend to be highly recession-resistant as they support the survival of societies, giving generational-wealth investors a unique combination of growth and stable income.
For the first three quarters of the year, the infrastructure real estate investment trust (REIT) reported $13 billion in revenue, 21% more than in the same period last year. However, higher interest expenses and lower mark-to-market gains put pressure on the bottom line. Still, net income during that time frame increased 41% to $505 million, and funds from operations (FFO) income, a proxy for a REIT's free cash flow, came in at just under $1.7 billion for the period.
That easily funded almost $1.1 billion in distributions to shareholders. The dividend, which amounts to $1.53 per share, offers a dividend yield of 5.7%. In comparison, the S&P 500 average dividend is around 1.5%.
Admittedly, the stock has struggled this year, with the price falling by almost 15% during the year. Nonetheless, the company continues to grow revenue and earnings at a rapid clip. Considering past increases and likely future growth, a forward P/E ratio of 30 may be a reasonable price to pay to capitalize on Brookfield Infrastructure's high payout, stability, and growth potential.
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November 27, 2023 at 08:30PM
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3 Stocks That Could Create Lasting Generational Wealth - The Motley Fool
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