2 Stocks To Hold Forever

It’s more tempting than ever to quickly buy and sell stocks to realize fast returns but the best long-term strategy for building wealth in the stock market has always been to buy good companies at fair or undervalued prices and holding them for years or decades.

Two of the best stocks to buy and hold forever in today’s market are Berkshire Hathaway (NYSE:BRK.B) and Alphabet (NASDAQ:GOOGL).

Berkshire Hathaway

The investment conglomerate created by Warren Buffett and the late Charlie Munger, Berkshire Hathaway is arguably one of the best and most stable investments that has ever existed. Historically, this stock has roughly doubled the average returns of the S&P 500.

As Buffett has personally observed many times, Berkshire’s ability to compound at such high rates has waned over the years. Even so, the company’s outlook is still quite solid due to its expertise in buying excellent businesses at reasonable prices.

Much of Berkshire’s near-term gains could come from continued acquisitions in the energy sector. Two of Buffett’s top 10 holdings are Occidental Petroleum and Chevron, both of which Berkshire has been investing heavily in over several years.

Recently, Buffett went on an aggressive buying run in Occidental, bolstering his stake to 29% of the company. Berkshire Hathaway has a standing regulatory approval to acquire up to 50% of Occidental, and it seems likely that Buffett will gradually exercise that option.

What’s more, Berkshire has one of the most impressive balance sheets in the American corporate world. The company has a massive $189 billion of cash on hand, more than the market caps of many large and prominent companies.

This stockpile has built up due to the cash flows produced by Berkshire’s holdings and gives the company the ability to make massive investments whenever Buffett or his eventual successors see appealing opportunities. The company also has no long-term debt, making its financial position virtually impregnable.

Thanks to its cash reserve, Berkshire has spent the last several years aggressively repurchasing its shares. Since the beginning of 2020, the number of Berkshire shares outstanding has fallen from 2.45 billion to 2.16 billion.

With more than enough in liquid reserves to continue this buyback activity almost indefinitely, it’s highly likely that long-term shareholders will continue to see their ownership stakes concentrate in the coming years.

Another very positive aspect of Berkshire is its ability to ride out recessions. A combination of well-diversified businesses, a rock-solid investment portfolio and the company’s own lack of debt makes Berkshire a largely recession-resistant stock.

Indeed, the volatility that comes with economic downturns often creates buying opportunities for value investors like Buffett, meaning that Berkshire’s investment strategy can actively benefit from recessions.

A final consideration for those who are willing to buy Berkshire and hold it indefinitely is the fact that the stock will almost certainly offer attractive dividends one day.

Buffett has historically resisted cash distributions on the assumption that Berkshire’s capital can generate higher returns for shareholders through continued reinvestment.

With cash reserves still growing quickly, though, Berkshire may eventually end up with more cash on hand than it can deploy effectively. When this happens, beginning to pay dividends will be the next natural course of action.

Alphabet

As the parent company of Google, Alphabet enjoys a near-total monopoly on internet search traffic.

Google’s market share in this area is over 90 percent globally, resulting in an extremely strong moat around the company’s business of delivering ads alongside search results. Alphabet’s video platform, YouTube, is also a lucrative advertising platform with about 2.5 billion monthly active users.

Between these and other businesses, Alphabet has generated over $307 billion in revenue and nearly $74 billion in net income over the trailing 12-month period.

Even more important for investors, though, is the company’s runway for strong continued growth. In the coming five years, analysts project Alphabet’s earnings per share to rise at a compounded rate of about 17.7%.

Looking even further down the line, Alphabet’s investments in emerging technologies like AI could set the stage for even more earnings growth. Earlier this year, the company debuted a slate of AI projects that could prove very valuable in the long run.

The company’s chatbot, Gemini, is being integrated into both its Google search results and its line of smartphones. AI functionality could help to make both search results and ads more relevant to users, creating opportunities for improved advertising revenue for Alphabet.

Alphabet is even in a position to begin moving into the chip manufacturing space. While companies like NVIDIA and AMD attract the most investor interest in this area, Alphabet has been quietly building up its own capability to produce leading AI-capable semiconductors. The best example of this is the Trillium chip, released earlier this year.

Much like Berkshire, Alphabet boasts a very large cash position that gives it a great deal of latitude to make new investments and spend on growth initiatives. In Alphabet’s case, the reserve stands at about $108 billion.

Though it has declined a bit over the last few years, this is more than enough for Alphabet to invest freely in almost any venture management sees as beneficial.

While Berkshire may still take several years to begin paying dividends, Alphabet has already started to distribute some of its cash holdings to shareholders.

Earlier this year, the company announced its first-ever quarterly dividend of $0.20 per share. At current prices, this works out to a yield of just 0.4%. Given the company’s cash position, profitability and potential for continued earnings growth, though, it’s far from unlikely that shareholders will see robust dividend increases in the coming years.

A final attractive aspect of Alphabet for investors at the moment is the stock’s valuation. Despite its potential for sustained double-digit earnings growth, Alphabet shares trade at just 23.3 times forward earnings.

Given that the S&P 500 currently averages a forward P/E multiple of 22.7, Alphabet’s valuation looks very reasonable at the moment. This view of undervaluation also aligns with analyst price forecasts, which project a median price of about 8.6% above the current level over the coming 12 months.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.