Accepting his rebuke, let’s indulge ourselves in seemingly irrational long-term thinking with decades — not years — in mind. Finding investments that are likely to last a decade and provide handsome returns would require an investment to meet two criteria: It should be an enduring market leader with excellent economics, and it should be reasonably priced or even undervalued. Here are two stocks that could fit the mold.
Apple Inc. (NASDAQ:AAPL)
Apple Inc. (NASDAQ:AAPL)has a significant lead on competitors in the fast-growing worldwide tablet and smartphone markets in terms of profits. Apple boasts 72% of worldwide handset profits, according to Canaccord Genuity. Based on numbers from IDC, MacDailyNews estimates that Apple Inc. (NASDAQ:AAPL)’s share of worldwide tablet profits could amount to a whopping 85% — and they insist that this is a conservative estimate.
Yes, Apple’s gross margin has sank considerably, down 1,000 basis points to 37.5% compared to 47.4% in Apple’s second quarter from the year-ago quarter. Nevertheless, a 37.5% profit margin for an original equipment manufacturer, or OEM, is very impressive. It takes serious economies of scale and brand power to achieve a feat like this in consumer electronics. How does Apple Inc. (NASDAQ:AAPL) pull this off? Brand power! Consumers are still willing to pay premium dollars for Apple Inc. (NASDAQ:AAPL)’s products. This trend looks enduring given the iPhone’s 90% retention rate.
Apparently, however, the Street has found better investment opportunities elsewhere. Today, the stock trades at a paltry price-to-earnings ratio close to 10, making it one of the cheapest stocks in the S&P 500. This harshly contrasts with the average analyst estimate for 20.7% EPS growth per annum for the next five years. Surprisingly, this estimate is 5% per annum higher than the average estimate for Google Inc (NASDAQ:GOOG) over the next five years. Even so, Google Inc (NASDAQ:GOOG) trades at a significantly higher price-to-earnings ratio of 24.22
Baidu.com, Inc. (ADR) (NASDAQ:BIDU)
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) (aka the “Chinese Google”) boasts a 73% share of search market traffic in China, according to comScore. Compare that to Google’s 66.7% share of the search market in the U.S. Despite the company’s massive success in China, its stock has been hit hard.
