In this article, we will take a look at the 15 best stocks to buy and hold for 3 years.
With out of control inflation, falling banks, uncertain geopolitical situation and layoffs all around you, it’s hard to stay focused on your long-term investing goals. But if we look at the history, there’s almost always a crisis looming large in financial markets. Investing in quality stocks and staying invested for the long term differentiates successful investors from average investors.
How Long is a Long-Term Investment?
Stocks outperform government bonds, but only when held for the long term. Several studies show that if you invest in stocks and cash out during volatility or downturns, you miss out on the potential gains that come during bull runs. According to an excellent paper titled “How Long is a Long-Term Investment” authored by Pu Shen of Federal Reserve Bank of Kansas City – Economic Research Department, from 1926 to 2002, the total compound annual rate of return of an index of all U.S. stocks, including dividends, was about 9.7%. On the other hand, long-term government bonds average only about 5.5%.
The paper says that the average business cycle in the US is 8 years. If you stay invested in stocks for say one or two decades, the short-term risks become irrelevant since short-term price movements of stocks offset each other over long business cycles. That’s why the risks associated with stocks decline faster when the average holding period increases. This is the power of long-term investing and that’s what makes people like Warren Buffett successful in a highly-volatile stock market.
In an interview with Bloomberg, Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky, explained the important of maintaining a long-term approach in these words:
We’re telling clients to think long-term and stick to their plan. We expect more volatility in the near-term, including the possibility of retesting the October lows early in the year, but we think the setup for long-term investors is starting to look attractive. Valuations have mostly reset, and fixed-income yields are still hovering around decade highs. More tactically, we think near-term caution and defensive positioning makes sense. We’d favor adding to quality in both fixed income and equities and using rallies to reduce exposure to more speculative assets as we head into an economic slowdown or recession.
Methodology
In March, Morgan Stanley shared a list of 30 stocks it believes are suitable buys for 2025. The firm said it “sought to identify the best franchises, not the most undervalued stocks.” The firm mentioned that it was largely “agnostic” about these stocks’ valuations and its guiding principle in choosing these stocks was to create a list of companies “whose business models and market positions would be increasingly differentiated into 2025.”
We scanned the list and picked 15 stocks with the highest number of hedge fund investors. We gauged hedge fund sentiment using Insider Monkey’s database of 943 hedge funds and their holdings.
Photo by AlphaTradeZone
Best Stocks to Buy and Hold for 3 Years According to Morgan Stanley
15. Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 49
Defense giant Northrop Grumman Corporation (NYSE:NOC) ranks 15th in our list of the best stocks to buy and hold for the next 3 years according to Morgan Stanley. The investment firm said Northrop Grumman Corporation (NYSE:NOC) plans to return 100% of free cash flows to shareholders this year.
As of the end of the last quarter of 2022, 49 hedge funds tracked by Insider Monkey had stakes in Northrop Grumman Corporation (NYSE:NOC). The net worth of these stakes was $1.5 billion. The biggest hedge fund stakeholder of Northrop Grumman Corporation (NYSE:NOC) is Rajiv Jain’s GQG Partners which owns a $428 million stake.
LRT Capital made the following comment about Northrop Grumman Corporation (NYSE:NOC) in its October investor letter:
“Based in Virginia, Northrop Grumman Corporation (NYSE:NOC) is one of the world’s largest defense contractors with annual revenue more than $30 billion. The company operates in a cozy oligopoly, that after decades of consolidation the US defense market is now controlled by five large companies: The Boeing Company (BA), General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), and Raytheon Technologies Corporation (RTX).
Industry barriers to entry are immense, government procurement cycles are extremely long, and the consolidated industry structure reflects this. This industry structure has allowed Northrop to earn stable mid-teens returns on invested capital (ROIC) and grow earnings per share at a rate of over 13% per year in the past decade, despite a topline that has grown only in-line with inflation. Even after the recent run-up in the stock price, it trades at approximate 15x, next year’s earnings estimates, far below the S&P 500 index, despite being an above average company. While nominally, there are five major defense contractors, the true industry concentration is even higher because not all companies compete in all possible business segments. General Dynamics’ division submarine division, Electric Boat, is the sole supplier of nuclear power submarines in the United States. Lockheed Martin is the sole supplier of the F-35 and F-22. Northrop was the sole bidder on the contract to develop the next generation of intercontinental ballistic missiles; and so on…” (Click here to read the full text)
14. Raytheon Technologies Corporation (NYSE:RTX)
Number of Hedge Fund Holders: 51
Morgan Stanley likes Raytheon Technologies Corporation (NYSE:RTX) because of the overall higher defense spending in the industry. The firm believes the spending could provide Raytheon Technologies Corporation (NYSE:RTX) a “multiyear growth outlook.” However, the firm said this growth could take time to materialize. Morgan Stanley, which has a $115 price target on Raytheon Technologies Corporation (NYSE:RTX), acknowledges the short-term supply chain disruptions faced by the company.
A total of 51 hedge funds tracked by Insider Monkey held stakes in Raytheon Technologies Corporation (NYSE:RTX). The net worth of these hedge funds’ stakes was $1.82 billion.
Carillon Tower made the following comment about Raytheon Technologies Corporation (NYSE:RTX) in its Q3 2022 investor letter:
“Raytheon Technologies Corporation (NYSE:RTX) announced strong results led by strength in its commercial segment, but weakness in its defense business led to investor consternation. Management guided to a recovery in this segment, citing both transitory supply chain issues and continued strong demand.”
13. Prologis, Inc. (NYSE:PLD)
Number of Hedge Fund Holders: 55
California-based REIT Prologis, Inc. (NYSE:PLD) ranks 13th in our list of the best stock to buy and hold for the next 3 years according to Morgan Stanley. The firm has a $128 price target on Prologis, Inc. (NYSE:PLD). Morgan Stanley said Prologis, Inc. (NYSE:PLD) is relatively safe from the slowing macro backdrop due to “favorable” supply/ demand dynamics.
Insider Monkey’s proprietary database of 943 hedge funds shows that 55 hedge funds had stakes in Prologis, Inc. (NYSE:PLD). The most notable stakeholder of Prologis, Inc. (NYSE:PLD) was Jeffrey Furber’s AEW Capital Management which owns a $316 million stake.
ClearBridge Sustainability Leaders Strategy made the following comment about Prologis, Inc. (NYSE:PLD) in its Q4 2022 investor letter:
“Real estate holdings Equinix (EQIX) and Prologis, Inc. (NYSE:PLD) were standouts in a sector challenged by materially higher interest rates. Equinix is a best-in-class data center REIT with record leasing and backlog and a conservative balance sheet that should position it well in a downturn. Logistics real estate, meanwhile, has some of the most attractive market dynamics of all real estate subsectors, and Prologis is a clear leader within the group. Logistics real estate should continue to benefit from secular tailwinds of rising e-commerce penetration, ever faster delivery times, and supply chain resiliency (“just in case”).”
12. Linde plc (NYSE:LIN)
Number of Hedge Fund Holders: 56
Chemical company Linde plc (NYSE:LIN) ranks 12th in our list of the best stocks to buy for the next 3 years according to Morgan Stanley. The investment firm believes Linde plc (NYSE:LIN) is an “underappreciated self-help story, backstopped by visible EPS growth, pricing power, and balance sheet flexibility.” Morgan Stanley has a $365 price target on the stock.
As of the end of the last quarter of 2022, 56 hedge funds tracked by Insider Monkey had stakes in Linde plc (NYSE:LIN). The total worth of these stakes was $2.8 billion. The biggest stakeholder of Linde plc (NYSE:LIN) during this period was Ian Simm’s Impax Asset Management which owns a $945 million stake in the company.
Madison Funds made the following comment about Linde plc (NYSE:LIN) in its fourth-quarter 2022 investor letter:
“Linde plc (NYSE:LIN) stock was strong during the fourth quarter following a solid third quarter. Linde remains well positioned with the passage of the Inflation Reduction Act and energy transition with carbon dioxide sequestration opportunities, gasification services, and various hydrogen projects. Linde and Schlumberger announced that they entered into a collaboration of carbon capture, utilization, and sequestration (CCUS) projects to accelerate decarbonization solutions across industrial and energy sectors. The collaboration will combine decades of experience in carbon dioxide capture and sequestration. The collaboration will focus on hydrogen and ammonia production where carbon dioxide is a by-product. The International Energy Agency estimates that 6 Gigatons of carbon dioxide will need to be abated with CCUS in order to reach net zero by 2050. During the quarter, Linde also announced that it became a signatory to the United Nations Global Compact (UNGC), the world’s largest corporate sustainability initiative. As a signatory, Linde has committed to aligning its strategy and activities with the UNGC’s Ten Principles across human rights, labor, environment, and anti-corruption.”
11. NextEra Energy, Inc. (NYSE:NEE)
Number of Hedge Fund Holders: 61
Morgan Stanley believes NextEra Energy, Inc. (NYSE:NEE) could be among the “leaders” in developing new markets and capturing “attractive low-risk returns.” The firm has a $97 price target on NextEra Energy, Inc. (NYSE:NEE).
NextEra Energy, Inc. (NYSE:NEE) is also extremely popular among hedge funds. As of the end of the fourth quarter of 2022, 61 hedge funds tracked by Insider Monkey were bullish on NextEra Energy, Inc. (NYSE:NEE). The biggest hedge fund stakeholder of NextEra Energy, Inc. (NYSE:NEE) was Phill Gross and Robert Atchinson’s Adage Capital Management which owns a $169 million stake.
NextEra Energy, Inc. (NYSE:NEE) is also a solid dividend payer. Earlier this year, NextEra Energy, Inc. (NYSE:NEE) upped its quarterly dividend by 10%.
10. Cheniere Energy, Inc. (NYSE:LNG)
Number of Hedge Fund Holders: 64
Morgan Stanley believes Cheniere Energy, Inc. (NYSE:LNG) could benefit from “resilient FCF” which is expected to support declining leverage, growing dividend and stock buybacks. The firm has a $189 price target for Cheniere Energy, Inc. (NYSE:LNG).
Insider Monkey’s database of 943 hedge funds shows that 64 hedge funds tracked by Insider Monkey were bullish on Cheniere Energy, Inc. (NYSE:LNG) as of the end of the fourth quarter of 2022. The total worth of these stakes was about $1.9 billion. The most notable hedge fund stakeholder of Cheniere Energy, Inc. (NYSE:LNG) is D E Shaw which owns a $136 million stake.
TimesSquare U.S. Mid Cap Growth Strategy made the following comment about Cheniere Energy, Inc. (NYSE:LNG) in its Q4 2022 investor letter:
“Within Energy, Cheniere Energy, Inc. (NYSE:LNG) is an energy infrastructure company that operates liquefied natural gas (LNG) terminals in Louisiana and Texas. Despite reporting inline for the latest quarter, its stock traded down -9%. Contributing factors were Europe had filled its storage ahead of the winter and a recent dip in natural gas pricing. The market for LNG is likely to remain tight for the next several years. Notably, Cheniere paid down $1.3 billion of long-term debt and repurchased $75 million of common stock during the quarter. Cheniere is well positioned to benefit from ongoing tightness in global gas markets.”
9. Lululemon Athletica Inc. (NASDAQ:LULU)
Number of Hedge Fund Holders: 65
Morgan Stanley has a $387 price target on Lululemon Athletica Inc. (NASDAQ:LULU), which shows a strong upside potential from the current levels of $364 as of April 14. Morgan Stanley likes Lululemon Athletica Inc. (NASDAQ:LULU)’s ability to take market share in “an attractive category, coupled with EBIT dollar growth.”
As of the end of the last quarter of 2022, 65 hedge funds tracked by Insider Monkey had stakes in Lululemon Athletica Inc. (NASDAQ:LULU), up from 57 hedge funds in the previous quarter. The total value of these stakes was $2 billion. The most notable hedge fund stakeholder of Lululemon Athletica Inc. (NASDAQ:LULU) was Paul Marshall and Ian Wace’s Marshall Wace LLP which owns a $323 million stake in the company.
8. NIKE, Inc. (NYSE:NKE)
Number of Hedge Fund Holders: 71
Morgan Stanley is bullish on NIKE, Inc. (NYSE:NKE)’s direct-to-consumer strategy. The firm believes NIKE, Inc. (NYSE:NKE)’s DTC strategy could not only drive revenue growth but also improve profitability. Morgan Stanley has a $140 price target on NIKE, Inc. (NYSE:NKE).
In March, NIKE, Inc. (NYSE:NKE) reported fiscal third quarter results. GAAP EPS in the period came in at $0.79, beating estimates by $0.25. Revenue in the quarter increased by about 14% year over year to reach $12.39 billion, beating estimates by $910 million. NIKE, Inc. (NYSE:NKE) Direct sales jumped 17% in the period to $5.3 billion.
ClearBridge All Cap Growth Strategy made the following comment about NIKE, Inc. (NYSE:NKE) in its Q4 2022 investor letter:
“NIKE, Inc. (NYSE:NKE) has been pressured by an uneven global recovery that led to surplus inventory. We added to the position earlier in the year with the view that its inventory write-down should not derail the company’s long-term high-single-digit revenue growth or the margin expansion from its enhanced focus on the direct-to-consumer business. While near-term earnings estimates may have some risk, much of the multiple contraction is in the current value of Nike shares and sentiment has shifted, with the shares bouncing 40% higher during the quarter. Netflix is another earnings reset name that has taken decisive actions, developing an ad-supported subscription tier and cracking down on password sharing, that have helped its shares rerate strongly.”
7. American Express Company (NYSE:AXP)
Number of Hedge Fund Holders: 71
Morgan Stanley has a $186 price target on financial services company American Express Company (NYSE:AXP) stock. The firm said it believes slowing growth in expenses related to marketing and card member acquisition could help American Express Company (NYSE:AXP) drive about 430bp operating leverage growth in 2023. Morgan Stanley thinks this operating leverage growth trajectory could continue in 2024 as well.
A total of 71 hedge funds tracked by Insider Monkey had stakes in American Express Company (NYSE:AXP) as of the end of the fourth quarter of 2022. The total worth of these stakes is about $27 billion.
6. Eli Lilly and Company (NYSE:LLY)
Number of Hedge Fund Holders: 76
Morgan Stanley has a $444 price target on Eli Lilly and Company (NYSE:LLY), which shows a huge upside potential from the current levels. Morgan Stanley believes Eli Lilly and Company (NYSE:LLY) could grow its revenue at a CAGR of 10% from 2023 to 2030. This revenue growth “should expand margins from 28% in 2022to >40% in 2025+, driving EPS growth of 18%, on our estimates,” the firm said.
Eli Lilly and Company (NYSE:LLY) is one of the most popular pharmaceutical stocks among the elite hedge funds tracked by Insider Monkey. At the end of 2022, 76 hedge funds tracked by Insider Monkey had stakes in Eli Lilly and Company (NYSE:LLY). The biggest stakeholder of the company is Rajiv Jain’s GQG Partners which owns a $603 million stake in Eli Lilly and Company (NYSE:LLY).
Baron Funds made the following comment about Eli Lilly and Company (NYSE:LLY) in its Q4 2022 investor letter:
“Eli Lilly and Company (NYSE:LLY) is a large-cap pharmaceutical company. Shares increased on investor optimism about Lilly’s new product pipeline, which includes Mounjaro for diabetes and obesity and Donanemab for Alzheimer’s disease. We continue to think Lilly has a healthy base business with limited near-term patent expirations, a strong pipeline, and potential for significant margin expansion, which should translate to strong revenue and earnings growth over at least the next five years.”
5. Exxon Mobil Corporation (NYSE:XOM)
Number of Hedge Fund Holders: 79
Exxon Mobil Corporation (NYSE:XOM) ranks 5th in our list of the best stocks to buy and hold for the next 3 years. Morgan Stanley, which has a $114 price target on Exxon Mobil Corporation (NYSE:XOM), believes that the stock would benefit from strong prices in the oil and gas sector. Morgan Stanley also likes Exxon Mobil Corporation (NYSE:XOM)’s proactive decarbonization strategy which it believes should “de-risk” the company’s longer term cash flows and “mitigate terminal value uncertainty.”
Exxon Mobil Corporation (NYSE:XOM) is also one of the best oil stocks to buy according to elite hedge funds. Insider Monkey’s proprietary database of 943 hedge funds shows that 79 hedge funds tracked by Insider Monkey had stakes in Exxon Mobil Corporation (NYSE:XOM). The biggest hedge fund stakeholder of the company is Rajiv Jain’s GQG Partners which owns a $3.6 billion stake.
4. Thermo Fisher Scientific Inc. (NYSE:TMO)
Number of Hedge Fund Holders: 92
Morgan Stanley “firmly” believes in Thermo Fisher Scientific Inc. (NYSE:TMO)’s ability to “outgrow its peers and end markets driven by a combination of increasing exposure to high-growth verticals.” The firm also likes Thermo Fisher Scientific Inc. (NYSE:TMO)’s “relentless focus” on stock gains fueled by “the breadth, depth and reach of their portfolio.” Morgan Stanley has a $670 price target on Thermo Fisher Scientific Inc. (NYSE:TMO).
As of the end of the last quarter of 2022, 92 hedge funds tracked by Insider Monkey had stakes in Thermo Fisher Scientific Inc. (NYSE:TMO). The total worth of these stakes was over $7 billion. The most significant stake in Thermo Fisher Scientific Inc. (NYSE:TMO) was owned by Thomas Steyer’s Farallon Capital which owns a $640 million stake in the company.
Polen Capital made the following comment about Thermo Fisher Scientific Inc. (NYSE:TMO) in its Q4 2022 investor letter:
“Thermo Fisher Scientific Inc. (NYSE:TMO) is a leader in attractive end markets with a skilled management team who has demonstrated the ability to consistently and wisely allocate capital. It is the world leader in serving science. It is a globally scaled supplier serving more than 400,000 customers working within pharmaceutical and biotech companies, hospitals and clinical diagnostic labs, research institutions, and government agencies. Thermo provides many of the products and services that companies in these industries, particularly pharma and biotech, need to operate and drive science forward. The company manufactures and sells instruments, reagents, and consumables used for a wide range of applications in labs.
Sales are also well balanced geographically, including leading scale in emerging markets, according to our research.
The business meets all our financial guardrails. We view Thermo Fisher as an extremely durable business, and we expect mid- to high-single-digit organic revenue growth over the long term. With expanding margins and wise capital deployment, we expect mid-teens underlying earnings per share growth over the next three to five years.
We also think Thermo Fisher’s business would be very durable in an economic downturn as pharma and biotech customers account for roughly 60% of the company’s sales today and roughly 80% of sales are highly recurring consumables and services. Thermo received a COVID boost as they supply COVID PCR tests as well as some products used in the production of COVID vaccines. As such, it is in the process of growing over that excess demand. We expect the company to move past this growth headwind by the back half of 2023. At approximately 24x our estimate for nexttwelve-months earnings per share, we believe Thermo’s valuation is attractive for this type of consistent, well-managed, and durable business.”
3. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Holders: 100
Morgan Stanley likes the fact that 20% of JPMorgan Chase & Co. (NYSE:JPM)’s branch network is less than 10 years old. This percentage is much higher than the industry average of 12%, according to the investment firm. Morgan Stanley has a $173 price target for JPMorgan Chase & Co. (NYSE:JPM), which is also highly popular among the smart money investors. Insider Monkey’s proprietary database of 943 hedge funds shows that 100 hedge funds tracked by Insider Monkey were bullish on JPMorgan Chase & Co. (NYSE:JPM). The most significant shareholder of the company is Edgar Wachenheim’s Greenhaven Associates which owns a $643 million stake.
2. Alphabet Inc. (NASDAQ:GOOG)
Number of Hedge Fund Holders: 152
Alphabet Inc. (NASDAQ:GOOG) ranks 2nd in our list of the best stocks to buy and hold for the next 3 years according to Morgan Stanley. Alphabet Inc. (NASDAQ:GOOG) is also one of the most popular stocks to buy according to hedge funds. A total of 209 hedge funds tracked by Insider Monkey had stakes in Alphabet Inc. (NASDAQ:GOOG).
Morgan Stanley has a $135 price target for Alphabet. The firm believes Alphabet Inc. (NASDAQ:GOOG)’s management is “focused on durably reengineering the cost base.”
Oakmark Global Select Fund made the following comment about Alphabet Inc. (NASDAQ:GOOG) in its Q1 2023 investor letter:
“Alphabet Inc. (NASDAQ:GOOG), a global communication services provider based in the U.S., was a top contributor to the Fund’s performance for the quarter. Fourth-quarter earnings for Alphabet came in around consensus expectations in most of its key business areas, and much of management’s discussion on the earnings call revolved around the recent AI developments and costs. CEO Sundar Pichai said Alphabet is an “AI-first company” that is “extremely well-positioned as AI reaches an inflection point.” He expressed excitement about the AI-driven developments the company plans to unveil in search and other areas. Chief Business Officer Philipp Schindler suggested that, just as mobile computing helped drive higher revenue and profits in search, AI should also have a positive impact on financial performance. Notably, CFO Ruth Porat pushed back on the idea that higher computing costs related to AI-driven services would incrementally pressure profitability. Pichai also said the company is “on an important journey to re-engineer our cost structure in a durable way.” Porat did not provide detail in terms of quantifying COMMENTARY Oakmark Global Select Fund: First Calendar Quarter 2023 March 31, 2023 Share: Á à savings. However, she noted that the company is slowing the pace of operating expenditures growth, including a meaningful slowing in the pace of hiring in 2023, with most of the impact expected to become more visible in the financials in 2024. She implied that margins are expected to go up over the next couple of years, mentioning that “revenues will grow faster than expenses.” Total capital expenditures in 2023 are expected to be in line with the 2022 level. In aggregate, management expressed confidence in the business prospects across search, YouTube, cloud and various other key businesses, but Porat observed that “the challenging macroeconomic climate is ongoing.” Overall, we believe the company is positioned well to reap the benefits of the scale of its search business and years of investment into AI capabilities. We also appreciate that the company is transforming its views on cost discipline and efficiency. Our research indicates that Alphabet is trading around its lowest relative price[1]to-earnings ratio on forward consensus earnings since its initial public offering 20 years ago. When we adjust our valuation for losses in its “Other Bets” segment and include an asset value for its cloud segment, we believe the stock trades at an even lower multiple. To us, this is too cheap of a valuation for a company with businesses, like search, YouTube and Android, which have durable competitive advantages and attractive secular growth outlooks.”
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 259
Everyone seems bullish on Microsoft Corporation (NASDAQ:MSFT) these days, as the company keeps making headlines with its AI advances. Microsoft Corporation (NASDAQ:MSFT) is also the most popular stock among the 943 hedge funds tracked by Insider Monkey. 259 hedge funds entered the first quarter of 2023 with Microsoft Corporation (NASDAQ:MSFT) in their portfolios.
Morgan Stanley thinks Microsoft Corporation (NASDAQ:MSFT) is on a path to deliver five quarters of “accelerating EPS growth from the Q2 trough.” The firm thinks Microsoft Corporation (NASDAQ:MSFT) is “significantly undervalued at current levels.” Morgan Stanley has a $307 price target on the stock. As of market close on April 13 Microsoft Corporation (NASDAQ:MSFT) was trading at around $289.
You can also take a peek at 10 Most Profitable Small Businesses in 2023 and 10 Best April Dividend Stocks To Buy.
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Disclosure: None. 15 Best Stocks to Buy and Hold for 3 Years is originally published on Insider Monkey.
