Image Source: Getty Images
Investing everything in one stock is generally not a good idea. Instead, it is often wise to diversify across stocks, sectors, geographies, and asset classes.
However, hypothetically picking just one stock can be a decent exercise for investors to focus on what matters with potential investments. So if you could pick just one stock to hold for the long term, what would it be?
things to consider
In deciding, I would avoid some of the factors that can contribute to low long-term returns and additional risk. For example, it would ignore the unsuccessful ventures of ‘tomorrow’. And it would avoid the operational volatility that can arise with some of the smaller publicly traded companies. But avoiding stocks like those two types can mean missing out when small businesses grow into big ones.
However, I would also be wary of any business with cyclical operations. However, by ruling out cyclicals, several long-term growth opportunities will not be available to me. In fact, it’s common for multi-bag stock to come from sectors like retail and hospitality. Sometimes cyclical businesses expand by scaling up a smaller operation and duplicating it elsewhere.
However, every recession causes some cyclical businesses to fail outright. So I would be willing to forego the risk of choosing one of those. And, to me, that means aiming to invest in a business with defensive characteristics.
But not just any old defensive business will do. Another requirement is that the company has a solid balance sheet without too much debt. However, defensive traders tend to have steady cash inflows regardless of the prevailing economic climate. And a good cash yield often leads to a strong balance sheet.
growth is important
However, the defensive business you choose will also need to have an identifiable growth track ahead. The business must have the potential to increase its profits and cash flow each year, even if only a little.
And defensive companies often grow because they have an economic advantage in their markets. Something that allows the company to protect its market share and profitability by keeping competitors at bay.
For example, the company may have strong brands and have economies of scale. And perhaps the company has good access to capital to reinvest. In fact, a combination of factors often goes into keeping a business safe in your niche.
My choice to sleep well
The company I would choose for 100% of my cash would be an alcoholic beverage company Diageo (LSE: DGE). It’s a big deal with a market capitalization of close to £83bn. He is consistently profitable and defensive due to his powerful markings. The balance sheet is strong with a modest amount of net debt.
Also, multi-year cash flow and dividend growth records are beautiful things. And city analysts expect modest single-digit growth for earnings and dividend.
However, due to its attractions, Diageo tends to be highly valued. And that situation adds some risks for investors. On top of that, I may be wrong about Diageo’s ability to continue to maintain market share and grow profits going forward. And I don’t expect growth to turn off the lights either.
But if I had to pick just one, I would sleep well at night holding Diageo shares.
