7 stocks to hold (nearly) forever

December 3, 2004

No company is immortal, but these could deliver exceptional returns for decades.

If you were asked to put together a baseball dream team, you'd undoubtedly include legends such as Ruth, Clemens, Mays, Koufax, and Williams. Like a winning baseball team, your stock portfolio should also contain performers that you can count on to deliver year after year. Well-established, quality companies-those that have a history of solid earnings growth, increasing profits, and products that are in demand even in tough economic times, among other things-tend to outperform their peers even in weak or unsettled markets.

No investment is perfect, however. Like star athletes, the best companies have minislumps on occasion, and the prices of their stocks rise and fall for any number of reasons. But if you're patient and commit to holding any of the stocks mentioned in this article for 10 years or longer, you'll likely be richly rewarded, say the experts who've recommended them.

Citigroup. The world's largest financial services company is priced much more reasonably than it was four years ago, says Bill Nygren, portfolio manager of The Oakmark Fund. "Citigroup was one of many profitable, well-regarded companies that were overvalued in 1999 and 2000, which made it vulnerable when the market declined," he explains. "It sold at about 20 times earnings in 2000, when most other financial services companies were selling at 10 times earnings. The company's earnings have grown 50 percent since 2000, but the stock's price has fallen modestly. That has lowered the price-earnings ratio to about 10 times next year's expected earnings." The low P-E is good news for bargain hunters.

Moreover, Citigroup currently has a healthy dividend yield of 3.5 percent. (The dividend yield is the dividend divided by the stock's share price.) "In dividend yield alone," Nygren says, "you're getting the current return that you'd get from a five-year government note, but with a company that's likely to grow its earnings substantially over the coming years."

Goldman Sachs Group. Despite being in a cyclical business that's emerging from two rough years, this financial-services giant managed to increase sales 11 percent on average over the past six years. "Profit margins are increasing, and Goldman Sachs is on track to produce record earnings in 2004," says David Springsteen, a research assistant with Pinnacle Associates, an investment advisory firm in New York.

The company has three divisions: investment banking, trading and principal investment, and asset management. "Goldman Sachs is the market leader in handling mergers and acquisitions, a business that never goes away," says James Ferrare, a money manager with Pinnacle. "It's also an extremely prestigious and respected firm, which translates into a tremendous advantage when competing for new business."

Johnson & Johnson. "J&J is arguably the foremost brand in healthcare," says Lloyd S. Kurtz, a portfolio manager with Nelson Capital Management in Palo Alto, CA. "It's one of the oldest, most-established companies in the healthcare business, and it has been growing its earnings in the double digits for nearly two decades. Based on total return, it has massively outperformed the S&P 500 over the past 20 years, because it's constantly and aggressively reinventing itself." In the past decade, J&J has transformed itself through acquisitions from a low-tech medical-devices-and-supplies company to a more high-tech powerhouse. "They still make dental floss and bandages, but now they've got things like drug-coated coronary stents," Kurtz says. The company offers an enormous array of healthcare products, including biopharmaceuticals, nonprescription drugs, contact lenses, and nutritional supplements.