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Got $5,000? 3 Stocks to Hold for the Next 20 Years

Committing to buying and holding a stock for 20 years is no easy task. If you do it, you need to make sure the company will still be around then. As such, it makes sense to buy large companies with significant market positions and excellent long-term growth prospects; companies like United Parcel Service (NYSE: UPS), aerospace giant Raytheon Technologies (NYSE: RTX), and Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).

UPS

The package delivery giant is benefiting from surging e-commerce volumes and starting to convince investors that it can generate volume growth and margin expansion at the same time. That's a great recipe for long-term earnings growth.

There are three reasons to feel optimistic about the stock in the near and long terms. First, UPS looks well on its way to hitting the 2023 targets laid out in its investor day presentation in June. For example, the key to its overall margin expansion plan is to increase U.S. domestic package margin to a range of 10.5% to 12% in 2023, but management is already forecasting 10.5% in 2021.

Image source: Getty Images.

Second, investors shouldn't worry too much about the Amazon threat, as the reality is there's plenty of e-commerce volume to go around; it's a question of ensuring the right kind of volume -- something implied in CEO Carol Tomé's "better, not bigger" framework.

Third, the company's transformation strategy announced in 2018 received a boost due to the pandemic. Back in 2018, management outlined a plan to expand internationally, increase the profitability of its e-commerce deliveries, and grow in the healthcare and small and medium-sized business (SMB) markets. As the stay-at-home measures led to a surge in e-commerce volumes, UPS managed to build its SMB and healthcare relationships.

With the company's near-term growth prospects looking excellent, the pathway to its 2023 targets seems assured, and investors can expect long-term growth from a company whose network is unrivaled in the industry.

Raytheon Technologies

Aerospace giant Raytheon Technologies' diversification certainly helped it during the pandemic. For example, when the commercial aviation businesses (Pratt & Whitney and Collins Aerospace) took a hit from the collapse in flight departures and airplane deliveries, the two defense-focused businesses (Raytheon Missiles & Defense and Raytheon Intelligence & Space) helped the business with earnings and cash flow.

That balance will continue to benefit Raytheon in the coming years as the commercial aviation market builds a multi-year recovery. Pratt & Whitney's aircraft engines (in particular the geared turbofan on the Airbus A320 NEO aircraft) have decades of aftermarket revenue ahead of them. Meanwhile, Collins Aerospace is the most comprehensive aerospace supplier globally, offering everything from cabins to aerostructures, power units, and landing gear to avionics and electronics.

Image source: Getty Images.

Raytheon's defense businesses are in areas of military spending (cybersecurity, intelligence, missile defense, counter-unmanned aircraft systems, etc.) highly relevant to today's security threats.

CEO Greg Hayes believes the combination will lead Raytheon to generate more than $10 billion in free cash flow (FCF) in 2025. For reference, Raytheon's current market cap is around $129 billion. If the company can hit its targets, then investors are likely to see substantial returns from here.

Alphabet

Alphabet is a cash-generating monster, and that's likely to be the case whether it's broken up in the future or not. It might seem faintly absurd to describe a company with a near $2 trillion market cap as undervalued. However, according to Wall Street analysts, Alphabet is set to generate $235 billion in FCF over the next three years. That's a figure equivalent to nearly 12% of its current market cap. Moreover, its revenue, earnings, and FCF are forecast to grow in the mid-teens.

Whichever way you look at it, Alphabet is a growth company. Moreover, the latest third-quarter results show substantive growth in non-search areas (YouTube and Google Cloud). Search is still Alphabet's key activity (Google Cloud is still unprofitable), but the torrid rates of growth in the cloud suggest Alphabet will reduce its dependence on search in the future.

Image source: Getty Images.

For reference, the third-quarter growth figures in the table below use compound annual growth rates (CAGR) from 2019 to iron out the pandemic effects from 2020.

Alphabet Segment Q3 2019 Revenue Q3 2020 Revenue Q3 2021 Revenue 2019-2021 CAGR
Google Search $24.7 billion

$26.4 billion

$37.9 billion

24%

YouTube ads $3.8 billion

$5 billion

$7.2 billion

38%

Google network $5.3 billion

$5.7 billion

$8 billion

23%

Google other $4 billion

$5.5 billion

$6.8 billion

29%

Google services $37.8 billion

$42.6 billion

$59.9 billion

26%

Google Cloud $2.4 billion

$3.4 billion

$5 billion

45%

Total revenue $40.5 billion $46.2 billion $65.1 billion 27%

Data source: Alphabet presentations.

All told, Alphabet's substantive cash flow resources and dominant position in search and Android mean it will generate vast amounts of income for investors for many years to come. In addition, management can use the cash flow to invest in new ventures.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.


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