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It would be foolish to say there are stocks that one would never sell. Businesses and the environments in which they operate change and sensible investors leave the door open to reassessment.
The 13 stocks listed in The Never Sell List were therefore companies where we had the "intention" to never sell; high quality companies with deep and enduring competitive moats that we could take to the grave and whatever lies beyond. [St Peter: Do you have anything to confess? Intelligent Investor analyst: Yes. In 2002, we recommended selling Cochlear at $41.40. St Peter: You might want to remove that cardigan.]
None of the stocks nominated found a place on our current Buy List. But the aim of getting members to focus more on competitive advantages over time than valuation at a point in time was duly made.
The exercise did, however, raise a further issue. Once one accepts that interest rates are going to remain low for a long time, as suggested in What to do about a world turning Japanese, and that our preferred holding period is forever, what stocks might one day earn a spot on a Never Sell list?
That was the question I posed to your analytical team, one where the constraints were calculated to influence their decisions more than current stock valuations. If you have to buy a stock now, can't sell for a decade and don't care whether returns come from capital appreciation or dividends, the mind inevitably turns to business quality.
Why? Because if a business can successfully reinvest capital over a decade at a rate of return far greater than current rates of interest, there will be a tendency to grow and eventually exceed what might appear to be a currently-high valuation.
Here's a summary of the constraints posed:
And here are their stock selections incorporating them:
My three stocks include two sin stocks - Crown Resorts and Tabcorp - and global online car classifieds company Carsales. Carsales is the dominant provider of second hand car leads for dealers while its fledgling businesses in emerging markets should be much larger and more profitable businesses in a decade's time. The risk is that its high levels of profitability attracts competition, although network effects should offset that.
The sin stocks benefit from long, government-issued licenses, increasing tourism and population growth. Crown has clear plans to grow in the years ahead with its Barangaroo development in Sydney due to open in 2021 while Tabcorp's lottery business should grow consistently regardless of economic fluctuations as more people spend more money buying tickets online.
Company (ASX code)
Recent Price ($)
Buy Below ($)
26 Aug 19 (Hold - $15.50)
Crown Resorts (CWN)
22 Aug 19 (Hold - $11.48)
3 Oct 19 (Buy - $4.75)
21 Aug 19 (Hold - $20.24)
Commonwealth Bank (CBA)
9 Aug 19 (Hold - $79.25)
Equity Trustees (EQT)
1 Jul 19 (Hold - $30.87)
Although its wagering business faces competitive pressure that may or may not abate, the current ~20% of lottery tickets sold online is less than half that sold online in many other countries. Given the predictability of this trend, I'm going with Tabcorp.
This is such a terrific exercise. As value investors we get hooked on the idea that valuation is the basis of future returns. Increasingly, I'm of the view that it matters more in some cases than others. Some businesses have such enduring advantages that we should think less about value today than about long term value. We all need to remind ourselves to think in those terms when we are tempted to seek out superficially cheap stocks.
I'm looking for businesses with a moat that will likely deepen and widen over time. There are quite a few matching this criteria, including Nathan's pick, Carsales, but Seek is mine. The network effects are strong already but are getting stronger, making its moat ever-harder to cross. I also like that management is prepared to sacrifice current profitability for future growth.
The valuation looks silly as a result but that is the point of this exercise. We need to look past it. The international businesses are all good quality but the Chinese operation in particular has a long runway with huge potential. I also think there is ample scope for REA-style price increases and the ability to expand services.
As JG said in his recent review, "sentiment towards Seek could turn sharply negative if the ANZ or Asian divisions stumble". That could be a wonderful opportunity to build a meaningful position. But, thinking genuinely long term, it also starts to make sense now.
I'm a big fan of having a 'never sell' list. The 'never sell' stock that I hold in my personal list - that's not on Intelligent Investor's official list - is Commonwealth Bank.
This might seem surprising for two reasons. One, I'm not a bank stock 'fan boy' - Commonwealth Bank is the only bank I own (apart from Macquarie Group, which isn't really a proper bank). There's certainly 'earthquake' risk here - every decade or three a banking crisis occurs. That sliver of equity supporting all those loans can get wiped out very easily in a crisis, taking shareholders out with it.
My second reason relates to a criterion for this exercise; that interest rates will stay below 2% for a decade. That implies a lack of credit growth and pressure on net interest margins, which will make life tough for banks, which can only drop deposit rates to zero.
That said, Australia's big four banks are phenomenal businesses. Together, they control more than 80% of the country's mortgage lending. While there are some threats from technological change and funding risks, I'm willing to bet Commonwealth Bank will be a bigger bank in 2029.
It might even emerge stronger after a downturn, as it did following the acquisition of Bankwest during the Global Financial Crisis. Commonwealth Bank might well be called upon to acquire a weaker bank again if the need arose.
Yes, banking stocks are inherently risky, but it would have to take a lot for me to sell my stock. For me, Commonwealth Bank is a 'never sell'.
I considered Tabcorp for the Never Sell list but it's definitely my pick for this one. There are plenty of scenarios where I would want to sell the company's wagering division but with around half of company earnings coming from its monopoly as Australia's lottery provider, this operation is the next best thing to owning the Royal Australian Mint.
Around 80% of this division's earnings are from exclusive licenses that stretch out to more than 30 years. The Government also recently made clear that it would defend licenses by banning imposter 'synthetic lotteries'. Tabcorp's earnings are therefore very sturdy due to the fixed profit margin built into its games, the public's unending appetite for lotteries (even in recessions) and its long-dated exclusive licenses, with practically no direct competition.
Tabcorp isn't quite in the league of Sydney Airport or CSL; its wagering division and debt add an extra layer of risk, as does its Victorian lottery licence, which resets every 10 years. Plus, the 30-year license expiry means 'never sell' is too strong.
However, the stock's current valuation and 4.5% dividend yield goes some way to offsetting those risks. Tabcorp has many competitive advantages and will almost certainly be a bigger, stronger company 10 years from now. With luck, management may spin off the wagering division, giving investors a shot at owning a standalone mint.
My choice is trustee-services provider Equity Trustees. On a 3.8% free cash flow yield, this stock isn't clearly cheap but I expect high single-digit growth over the coming years; in a world of 2% rates, that seems more than adequate to justify the current valuation.
The company's private wealth division helps high net worth individuals, superannuation administrators and philanthropic trusts with things like estate planning and establishing and managing trusts, while the corporate division acts as a responsible entity for managed funds.
It's boring work, but it's probably one of the closest things to an annuity stream that exists on the ASX. Barriers to entry are high; because margins are tiny, a would-be competitor needs to amass billions in funds to become profitable. This has driven consolidation across the sector, leaving just three competitors in private wealth and two in corporate services. It isn't a monopoly but it is the next best thing; an oligopoly.
Equity Trustees also benefits from scale advantages, high barriers to entry, a favourable regulatory environment and annuity-style income. Barring a lawsuit, irrational competition or a market collapse, it should grow earnings consistently over time, making it the kind of defensive stock that should fare well over the next decade.
John Addis is the editor at Intelligent Investor. To access more share research and commentary from Intelligent Investor, start a 15-day free trial.