Everyone likes the shiny new thing. That’s true in retail, and it is true of investing. New companies operating in emerging industries tend to get the lion’s share of investor attention in hopes of finding the next big thing.
Without a doubt, a lot of tech stocks have the potential to be big winners. But you don’t have to look exclusively to tech to find long-term winners. There are solid companies with the potential for market-beating, long-term growth in industries that have been around for a long time. You just have to know where to look.
Here’s why three Fools believe GXO Logistics (NYSE:GXO), Ford Motor Company (NYSE:F), and Goldman Sachs Group (NYSE:GS), despite operating in stodgy, old industries, are likely to outperform the market over time.
The next big thing in e-commerce isn’t an e-commerce stock
Lou Whiteman (GXO Logistics): The explosive growth in online shopping has created a number of new retail titans, including Amazon and Shopify, and it has also put more of an emphasis on inventory management, warehousing, shipping, and managing returns. GXO is well-positioned to take on that burden for retailers, and it should be a huge beneficiary of the continued growth in e-commerce.
Technically, GXO perhaps shouldn’t be called “old school,” as it was only spun out of XPO Logistics on August 2. But transportation and logistics are about as old-economy as an industry gets, and GXO has been building its business inside XPO for years.
Few retailers on their own have the size and scale needed to match Amazon when it comes to logistics, but with many retailers outsourcing that task to GXO, they can gain efficiencies they would be unable to achieve on their own. GXO operates from 885 locations, primarily in North America and Europe, and it runs warehouses and manages supply chains for blue chip customers like Apple, Nike, Walt Disney, Nestle, Pepsico, and Whirlpool.
GXO expects to generate 17% adjusted EBITDA growth and 10% revenue growth through 2022. Today, about 40% of its revenue comes from pure-play e-commerce and omnichannel retailers, and the company said it has a $2 billion pipeline of new potential business on the horizon.
I fully expect e-commerce growth to continue for the foreseeable future, and I expect the top online retailers to continue to grow and benefit from that supertrend. But arguably the “Wild West” land-grab stage of e-commerce is now behind us, and as the law of big numbers catch up to large companies like Amazon, outsized growth from retail will become harder to generate.
GXO today is a $7 billion business chasing an outsourced logistics market of more than $130 billion. Even before the pandemic companies were beginning to move more and more of their logistics to outsourcers, a trend that has only increased due to COVID. Throw in in-house logistics operations and the total addressable market is more than $400 billion.
GXO likely won’t take all of that market, just as Amazon will never be the only online retailer; but GXO has the potential to double in size and then double again and still only own a small part of that total market. I think GXO is up to the challenge, and I expect it to produce returns that will handily beat the market for years to come.
Electric trucks from a start-up? Here’s a “better idea” for your EV truck — and your portfolio
John Rosevear (Ford Motor Company): There are a lot of lofty expectations baked into the market caps of tiny electric-vehicle makers like Workhorse Group, Lordstown Motors, and Canoo. All three of these companies are aiming to be players in the market for commercial vehicles, but as of press time, only Workhorse had actually shipped any trucks — and only a few.
I think we need to think bigger. I think the company that will dominate the market for electric commercial vehicles, at least in the U.S. and Europe, is the company that already leads those markets: Ford.
Let’s just consider one vehicle for now: the F-150 Lightning, due next spring. I think the F-150 Lightning has the potential to be one of the most important electric vehicles of the era, maybe the most important since Tesla‘s landmark Model S, because of its potential to bring a whole lot of new mainstream buyers to the world of EVs. The Lightning is loaded with clever features, built by a company that commercial and retail customers know they can rely on, and priced aggressively — just about $40,000 for starters, and around $50,000 if you want the longer-range version.
Sure, Lordstown might manage to ship a few of its Endurance commercial pickups before the first F-150 Lightnings reach customers. But if you’re a commercial fleet manager, concerned about reliability and total cost of ownership, why would you buy an Endurance, a brand-new product from a brand-new company that’s already in hot water, for $52,500 (for starters) when you could buy a Ford — a Ford! — with equal or better specs for a lot less?
I think if we look out 10 or 20 years from now, the market for electric commercial vehicles is going to be dominated by Ford and the other global giants that dominate the market for internal-combustion and hybrid commercial vehicles today.
And if the success of and critical praise for Ford’s Mustang Mach-E is any indication, I think Ford stands a good chance of gaining market share despite all these wannabe new entrants. That’s one reason why I think the next few years will be very good for Ford’s bottom line — and probably for auto investors holding its stock, too.
Value or growth? Why not both?
Rich Smith (Goldman Sachs): You say tomato, I say potato — and if you say that PayPal Holdings, Square, and all the other newfangled stars of the new fintech industry are better investments than old-school financial giant Goldman Sachs, well … I say you probably haven’t looked at their valuations closely enough.
I admit, PayPal and Square get a lot of headlines, and in recent years that’s translated into enormous stock price gains. PayPal is up 37% over the past 52 weeks and Square is up 99%. And yet, have you taken a gander at Goldman Sachs’ stock price performance? It’s up 87% over the past year, which is not too shabby. And even after that run, Goldman Sachs stock still sells for less than seven times trailing earnings.
That’s not just a bargain relative to the 63 P/E ratio on PayPal stock, or the 325 times earnings that Square costs. Seven times earnings is a bargain price, period.
But aren’t PayPal and Square growing faster than old-school Goldman, you ask? Well, yes and no. Last quarter, Square did grow its revenue 266%, which was faster than Goldman Sachs’ 32% growth rate. PayPal, on the other hand, grew only 19% — and its profits declined. And as for future growth, according to the latest estimates compiled by S&P Global Market Intelligence, Wall Street analysts have Goldman Sachs pegged for nearly 15% annualized income growth over the next five years.
True, that’s slower growth than the 24% rate posited for PayPal, or the 37% growth expected from Square. But Goldman Sachs’ 14.8% long-term growth rate divided into its 6.9 P/E ratio gives this stock a PEG ratio of less than 0.5. (Hint: Value investors usually consider PEG ratios below 1.0 a bargain). And that’s not even counting the bank’s above-market 2.1% dividend yield. For investors seeking value, I believe you’ll make more money by investing in the tried and true rather than the shiny and new.
And I think 152-year-old money-printing machine Goldman Sachs is a better bargain than PayPal or Square.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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