The stunning UK vote to exit the European Union sent shockwaves through much of the financial world—but it did not faze Mark Oelschlager. In fact, the mutual fund manager used it as an opportunity to quickly increase some of his long-held investments even as the overall stock market plunged.
That’s because Oelschlager looks ahead many years, rather than trying to boost returns for the short term. And that’s one of the reasons his Pin Oak Equity Fund ranks in the top 1% of its large-company stock category over the past 10 years.
Bottom Line Personal asked Oelschlager to choose some of the most attractive stocks that our readers could consider as shrewd investments for the next 10 years or more…
The Key Traits
Brexit—as the UK decision has been nicknamed—is likely to hurt global economic growth, slow the rise of US interest rates and keep investors on edge. But the companies that my team invests in can weather this uncertainty because they tend to be high-quality businesses with dominant positions in growing industries.
To find them, we look for the following characteristics—sustainable long-term advantages over competitors…disciplined management…sizable free cash flow that can be used to expand operations or reward shareholders through dividend payments…and reasonable valuations.
Eight of my favorite stocks now, by sector…
Financials
- Charles Schwab (SCHW). Customer assets at the financial-services firm soared from $1.1 trillion in 2008 to $2.6 trillion recently, yet earnings per share were flat. Reason: Low interest rates led Schwab to temporarily waive its fees on money-market funds—fees totaling about three-quarters of a billion dollars annually—so that investor returns on those funds would not go below zero. Even though the Federal Reserve has been cautious about raising its benchmark interest rate, I’m confident that interest rates will start rising at some point, which will boost Schwab’s earnings. At the same time, the company continues to benefit from a fast-growing lineup of proprietary products such as its own exchange-traded funds (ETFs) and its robo-adviser service, which uses software to generate and manage low-cost, customized portfolios. Recent share price: $26.92.
- Capital One Financial (COF) ranks as one of the 10 largest banks in the US. But it doesn’t make most of its money the traditional way—taking in deposits and then lending that money out in the form of mortgages and business loans. Instead, it derives more than 60% of its $23 billion in annual revenue from issuing credit cards, which charge much higher interest rates on outstanding balances. And when interest rates rise, credit card rates go up more quickly than those on other types of loans. Capital One also has grown through smart acquisitions. Its purchase last year of General Electric’s health-care financial-services business, which specializes in lending to hospitals, senior-housing businesses and other health-care–related companies, will provide a strong platform for growth. Recent share price: $68.85.
- Wells Fargo & Co. (WFC). The third-largest US bank had record earnings per share for five years in a row at a time when many other major banks have had lackluster earnings. The stock is attractive for the long term even though Wells Fargo suffered a major setback when it agreed to pay a $185 million fine, its CEO resigned and account applications plunged because it had opened two million unauthorized customer accounts. That was definitely disappointing, but the scandal doesn’t appear to have altered the company’s business for the long term. In other words, Wells Fargo was not a business that was built on unsustainable selling practices, so after it rebuilds trust, which will take some time, the company should be able to move past this. The diversity and scale of its operations provide an enduring edge over its competitors. Half of its revenue comes from fee-based businesses such as brokerage operations that aren’t as affected as loans are by low interest rates. And Wells Fargo is one of the best prepared in the industry to weather any future downturns. It did a terrific job of navigating the financial crisis that began in 2007, keeping profits in positive territory every quarter—a rarity for a bank during that time. Recent share price: $48.94.
Media
- Twenty-First Century Fox (FOX). The entertainment company’s stock looks particularly attractive after having dropped sharply in the past year over fears that consumers are watching less TV and more video on the Internet. The company is well-positioned not only to withstand this consumer trend but to benefit from it. Its cable programming will continue to command high fees from advertisers because in addition to its films, TV sitcoms and dramas, much of its programming is sports and news, two areas not threatened by Internet providers such as Netflix. Moreover, it jointly owns Hulu, the fast-growing video-streaming service. Recent share price: $28.62.
Technology
- Alphabet Inc. (GOOG). The parent company of Google worries some investors because it is spending heavily on such projects as self-driving cars. But we believe Alphabet will continue to see double-digit annual earnings growth for many years. It still controls 80% of the world’s online search market. It will attract even more digital advertising as its 2006 acquisition of YouTube matures. The video-streaming site is the third-most-visited site on the Internet. And Google spin-off Niantic helped develop the wildly popular app Pokémon Go. Recent share price: $720.95.
Advertising
- The Interpublic Group of Companies (IPG) is one of the largest ad agencies in the world, with offices in more than 100 countries. Even as slow economic growth around the world has depressed traditional ad spending, Interpublic picked up $146 million in new business last year, much of it related to the boom in digital advertising. Companies are increasingly relying on Interpublic to help reach customers through social media and to advertise on the Internet and through smartphones. Recent share price: $23.85.
Business Services
- Paychex (PAYX). The second-largest payroll processor in the US after Automatic Data Processing handles the preparation and delivery of employee checks and tax- and government-related paperwork for nearly 600,000 clients. The company typically raises prices by 2% to 4% every year without much resistance. Clients find it too expensive and complex to switch payroll processors. Paychex is now expanding into lucrative ancillary services such as helping small businesses with human resources, insurance and employee retirement and health-benefit plans. The stock recently yielded 3%. Recent share price: $61.12.
Insurance
- Travelers Companies (TRV). Founded in 1853, Travelers is the second-largest underwriter of commercial insurance in the US after AIG. Although the industry has struggled since the 2007–2009 recession, Travelers has been able to increase its prices significantly because it dominates the most profitable areas of the property and casualty industry. Rising interest rates also will boost revenues, which totaled $26.8 billion for 2015. Travelers, whose stock dividend recently yielded 2.3%, has been paying uninterrupted dividends for 144 years. Recent share price: $118.74.
