The Miracle of Compound Growth
Tax-Free!
10 Stocks to Hold Forever - Part Four
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In recent weeks, I've been writing a series called "Ten Stocks
to Hold Forever." You'll find the fourth stock of the series
discussed below, and background information on
Ten Stocks to Hold Forever here.
But first I want to spend a little time illustrating WHY holding
a great growth stock forever can be smart. So without further ado,
I'm proud to present "The Miracle of Compound Growth."
Imagine you start with $10,000. By following a proven investing
system (mainly investing at the right time in a great growth stock
and holding on) you're able to double it, to $20,000. That's pretty
good, but it's not great.
But then, by dint of more excellent stock-picking, combined with
a great bull market and a fair dose of patience, you're able to
double your money again, and again and again. At this point, your
$10,000 has metamorphosed into $160,000, for a gain of 15 times
your original investment. It's almost magical how this works! Yet
very few people are aware of this possibility and even fewer
attempt it.
And why not?
Excessive focus on the present is certainly one reason. You can
blame the media-in part-for that.
A lack of education about this miracle is another, and that's a
shame.
Because the numbers don't lie, and if you have any doubt, I urge
you to run the numbers for yourself. The exercise can be
eye-opening.
Now, there is one more reason that very few people are able to
multiply their investment 15 times, and it's that old bugaboo,
taxes.
Whenever you take a profit, the taxman wants his share. (The
exception is tax-advantaged retirement accounts.) Thus, if you
achieve this feat of doubling your money four times (in four
separate investments), but pay a 20% tax on your capital gains
after each sale, you'll end up not with $160,000 but $104,976.
That's still great, but it's not as great as $160,000.
You can see the difference here.
So, for any account subject to capital gains, it makes sense to
avoid taking gains whenever possible. And the best way to do that
is to never sell!
But not selling only makes sense if your investment still has
the potential to double in a reasonable time. And that means you
want to focus on stocks with major long-term growth potential,
stocks with the potential to change the world. (Doing so, said
author Tom Phelps of "100-to-1 in the Stock Market," will allow you
to benefit from the "unforeseeable and incalculable.") These are
not your solid, dividend-paying blue chip like Johnson &
Johnson and General Electric and McDonald's; their best growth days
are long behind them.
No, you want to own the next McDonald's (maybe it's Chipotle),
the next General Electric (maybe it's ARM Holdings) and the next
Johnson & Johnson (maybe it's Onyx Pharmaceuticals.)
All those potentially great growth stocks have been recommended
by Cabot advisories, but today I'm not writing about them. Instead
I'm sticking with the list of ten stocks created by the Cabot
editors, and today I'm focusing on a stock chosen by my daughter,
Chloe Lutts, who's editor of both Dick Davis Investment Digest and
Dick Davis Dividend Digest.
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The stock is
Equifax (
EFX
)
and it was originally featured in the November 7, 2012 issue of
Dick Davis Investment Digest, after it was recommended by Charles
B. Carlson of DRIP Investor.
Here's what Carlson wrote.
"Among my Editor's Portfolio stocks, none is probably better
situated for short-term gains than Equifax, Inc. The firm is a
leader in information solutions, leveraging one of the largest
sources of consumer and commercial data. The company provides
consumer-credit information, business-credit intelligence, fraud
detection and various marketing, human resources and e-commerce
services. The stock, which has been especially strong in recent
months in moving to an all-time high, has much to recommend it at
this time: An uptick in the housing and rental markets should spur
increased demand for the company's various consumer-credit
services. Record per-share profits this year and next should
provide support to the stock. And dividends should grow by double
digits over the next 12 months.
"I've always been a fan of companies that control large amounts
of data. Profit margins are typically high for such companies that
can generate a constant stream of new products and services from a
vast database of information. Equifax is the poster child for such
a business. To be sure, the firm is not without its risks. Given
the nature of its business, Equifax is vulnerable to governmental
investigations and potential increased regulations as to how its
data can be used. The firm recently agreed to pay $393,000 to
resolve allegations it broke the law by selling lists of consumers
who were late on their mortgage payments. The company's business is
also vulnerable to recessions, as evidenced by the stock price
falling below $20 during the 2008-2009 economic downturn.
"Still, consumers remain engaged at this point judging from
their spending patterns in recent months, and lending should loosen
up a bit in 2013, which would be a plus for the firm. Admittedly,
the stock, trading at 17 times 2012 earnings estimates, is not
cheap. However, I would not be surprised to see these shares
continue their upward momentum for the remainder of this year."
---
When Carlson wrote that, EFX was trading at 50.61, and it stayed
in that range through November, when it was featured in
Dick Davis Investment Digest.
Then on December 3, Equifax announced it would acquire the
credit services business of Computer Sciences Corp (
CSC
) for $1 billion, and investors cheered the deal, driving the stock
up from 51 to 54 on very high volume (and proving Carlson very
right in the process). It spent the rest of December consolidating
that gain, but the first days of January saw it climbing again;
last week it hit 56!
Short-term, a pullback is always possible, but long-term, Chloe
likes EFX because of its dominant presence in the industry of
consumer credit information. She likes it because the company, with
25% of its business coming from outside the U.S., has great global
growth potential. And she likes it because with annual revenues of
just $2 billion, the business can get a whole lot bigger.
Now, you could just buy EFX here and put it away for ten years.
My guess is that would work out pretty well. But ideally, you
should get on board at a lower-risk entry point, and for guidance
on that, you can hardly do better than to heed the recommendations
of Mike Cintolo, who's editor of Cabot's flagship investment
advisory, Cabot Market Letter.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Editor of Cabot Stock of the Month