It’s not easy being Santa. At least not around Christmas time.
Millions of children are waiting for new and exciting presents every year. Those presents need to be delivered within a very short time frame — all in one evening.
It’s no small wonder that Santa gets pretty stressed by 24 December and has little time to think about his investments. Thankfully, we are here to help him.
So what are Santa’s requirements when it comes to picking companies to invest in? The companies should:
- be easy to understand — Santa doesn’t have time for complicated business models;
- be a leader in their industry with a strong moat — he has seen many companies being replaced by competitors and new technologies;
- have strong cash-generation potential — Santa is a savvy investor, preferring hard cash to paper profits;
- be a long-term buy-and-hold investment opportunity — Santa has been around even longer than Warren Buffett, and (most probably) will be around longer. He is the ultimate long-term investor. Compared to him, our favorite octogenarian is a high-frequency trader.
Also, if the companies could help make Santa’s work easier, it would be an added bonus.
Luckily, there are three companies — Disney (NYSE:DIS), Amazon.com (NASDAQ: AMZN)(FRA:AMZ) and MasterCard (NYSE:MA)(ETR:M4I) — that fit the bill. Let’s have a quick look at each.
Even though the Magic Kingdom’s share price has recently reached an all-time high after a record fiscal year 2014 and a 34% dividend hike, it remains one of the favorite long-term stocks in the Motley Fool universe. It’s easy to see why: The media giant built an empire of movie studios (Disney, Pixar, Marvel), television companies (ABC, ESPN) and theme parks that keep generating increasing profits and an abundance of cash.
One of the key reasons is the excellent use of franchises, such as the Avengers characters or Toy Story. This allows the company to keep coming out with new blockbusters every year, benefiting both from the movies themselves and from their effect on Disney’s other business segments (like theme parks) and merchandising.
Another reason is ESPN, the number one sports cable channel in North America. While programmed TV in general is struggling compared to other viewing alternatives like Netflix (NASDAQ: NFLX)(ETR:NFC), live sports events are an exception, which helps ESPNs performance.
In addition, Disney is expanding its theme parks with the 2015 addition of the Shanghai Disney Resorts and its interactive presence with Infinity (one of the best-selling online games of 2013). Both should generate significant new sources of cash flow in the coming years.
In 2015, both the long-awaited sequel to the Star Wars saga — CEO Bob Iger’s latest brilliant acquisition of a hugely successful franchise — and the sequel to Avengers will hit theaters. Chances are both will become immensely successful.
All in all, there is no reason to believe that Disney’s cash generation magic will fade anytime soon. Besides, many kids will be delighted to find Disney merchandise under the Christmas tree — a definite plus for Santa whenever he is running out of ideas.
Over the last two decades, Amazon has become the world’s largest e-commerce company (based on sales). It has consistently used the cash it generated to continue its expansion into new territories — retail, marketplace, digital products such as e-books, or web services, to name a few — building strong economies of scale in the process. It has also been investing heavily to strengthen its supply chain infrastructure. The combination of these two impacts drives continuously reducing prices for the customers, which further fuels the company’s growth. Amazon’s moat is further expanded by its Amazon Prime offering, which binds more and more customers to its universe through its ever-increasing list of features such as free shipping or online movies.
There is little reason to believe the above trend will change: I expect Amazon to keep on expanding into new territories, disrupting new industries and generating more and more cash in the process. There will surely be stumbles and disappointments along the way. Not every idea will work out, and many investors will want to see more profits, and earlier.
We are currently seeing such a phase of disappointment: Amazon’s share price has taken a tumble in 2014, dropping around 25% compared to its all-time high at the beginning of the year. This may, however be an excellent chance for Santa to buy into one of the most disruptive companies in the world — and become part-owner of a business that may solve a large portion of his own logistical challenges on Christmas Eve.
As one of the two biggest companies in the global payment transaction processing industry — the other being Visa (NYSE:V) –, MasterCard enjoys a virtual duopoly. The company acts as a digital tollbooth operator, taking a small fee on each credit or debit card transaction going through its network. Between 2009 and 2013, MasterCard achieved an average 12% yearly revenue growth rate and an increase in operating margins from 50% to 55%. Earnings per share more than doubled over the same period, and free cash flow increased from $700 million to over $4 billion. A big chunk of this cash was used for share buybacks: Between 2011 and 2013, the board of directors approved buyback programs worth $9 billion. Of this, more than 95% was accomplished by September 2014.
Just like with the other two companies, there are strong arguments that MasterCard’s growth will continue: Global consumer spending is expected to increase in the future, and — based on the company’s own estimates — 85% of global retail payment transactions are still cash based, leaving tremendous room for growth. Also, while new competitors and payment methods such as Apple Pay may put some pressure on margins, they can also lead to new partnerships and more volumes for MasterCard as cash-based transactions become less dominant.
Even though the stock is trading just below its all-time high, which scares a lot of investors away, Santa does not fall into this trap and looks at the long-term growth potential. Besides, he would be happy if credit card transactions became more dominant — this could reduce the number of trips he has to make to the North Pole bank offices.
Conclusions of a Foolish Santa
Although none of the above mentioned three stocks seem cheap, each of them has a great chance to strongly outperform the overall market in the coming years and decades. Amazon and MasterCard ride the trend of increasing consumer spending coupled with more online and non-cash transactions, meanwhile Disney is building a portfolio of franchises that will be providing content to all of its business units for many years to come. Each of these companies is a leader within its industry with a strong moat, and each has excellent cash generation history.
Santa has recognized the long-term investing opportunity in Disney, Amazon and MasterCard — maybe you should, too.
Bis zu 130 Mrd. US-Dollar investiert Investorenlegende Warren Buffett in nur ein einziges Unternehmen. Das zeugt von riesigem Vertrauen in das Zukunftspotential.
Buffett hat so einige Mega-Milliardeninvestments in seinem Portfolio. Wir haben sie näher analysiert, und angesehen, inwieweit sie sich zum Nachahmen eignen.
Miklos Szekely owns shares of Disney, Amazon.com and MasterCard. The Motley Fool recommends Amazon.com, MasterCard, Netflix, Visa, and Walt Disney. The Motley Fool owns stock in Amazon.com, MasterCard, Netflix, Visa, and Walt Disney.