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6 Blue-Chip Stocks to Buy and Hold for the Next 10 Years

Daren Fonda

By Daren Fonda

Published Sept. 28, 2016

6 Blue-Chip Stocks to Buy and Hold for the Next 10 Years

When it comes to stocks, we like playing the long game: picking solid companies, sticking with them through tough times and hanging on for years, even a decade or more. Investing for the long haul can smooth out the risks of buying individual stocks, which may tumble or stay depressed for ages before taking off.

The following six members of the Standard & Poor's 500-stock index possess attractive long-range prospects: Each should be able to expand its sales and profits at rates well above the market average for years. (Read 10 Great Stocks for the Next 10 Years to learn about four more picks that aren't included in the index -- at least not yet.)

Investing for the next decade doesn't mean you can buy these stocks then forget about them. You'll need to follow them closely and may have to sell if cracks emerge in the business. Still, if these S&P 500 companies can keep building on their recent successes, they have a good shot at delivering superb returns over the long run.

Adobe Systems

Symbol: ADBE

Share price: $98.79

Market capitalization: $49.2 billion

52-week high/low: $71.27 - $104.16

Estimated earnings per share for the fiscal year ending in November 2016: $2.87

Estimated earnings per share for the fiscal year ending in November 2017: $3.81

Price-earnings ratio: 30

Dividend yield: none

The business: Adobe sells software, such as Photoshop, used by consumers and businesses for graphic design and digital imaging, along with cloud-based services and digital marketing tools.

What will drive growth: Creative types in advertising, media and other fields rely heavily on Adobe software, which faces scant competition in its niche. The firm is also making inroads into web analytics and digital marketing services, and it's migrating customers to a subscription model for its "Creative Cloud" suite of software products, creating a long and steady revenue stream.

The stock: At 30 times estimated profits, the stock isn't cheap. But Adobe is growing rapidly. Wall Street analysts see sales climbing 22%, to $7 billion, in the fiscal year that ends in November 2017. Profits should increase even faster, rising by 33%, a rate of growth that makes the high price-earnings ratio palatable, says brokerage firm Canaccord Genuity. Although the firm doesn't see big share-price gains over the near term, Adobe has "the ingredients for an exceptional long-term investment," Canaccord says.

Celegene

Symbol: CELG

Share price: $106.06

Market capitalization: $82.2 billion

52-week high/low: $93.05 - $128.39

Estimated 2016 earnings per share: $5.71

Estimated 2017 earnings per share: $6.99

Price-earnings ratio: 17

Dividend yield: none

The business: Celgene makes the cancer-fighting drug Revlimid and other biotech medicines.

What will drive growth: Boosted by Revlimid--a drug that modifies the body's immune system to fight cancer--Celgene aims to hit $21 billion in sales in 2020, up from an estimated $11.1 billion in 2016. Initially approved in 2006 as a second-line defense against multiple myeloma, a common type of blood cancer, the drug won approval in 2015 for patients newly diagnosed with the disease, expanding its sales and market potential. Revlimid has also been approved for other uses, and Celgene is now testing it to combat some types of lymphoma and leukemia. Other products in Celgene's lineup include medicines to treat advanced breast cancer and psoriasis. In addition, Celgene expects results in the next few years from more than a dozen late-stage drug trials--a pipeline of potentially new and expanded-use products that looks "underappreciated," says Bank of America Merrill Lynch.

The stock: Celgene's P/E has tumbled from 59 times earnings in 2014 to 17 times estimated year-ahead profits. The stock also slid, down 13% in the past year, due to concerns about unsustainably high drug prices and disappointing results in some of Celgene's clinical trials. Still, the shares now look cheap relative to expected earnings growth, estimated at 23% in 2017 and 24% in 2018.


Cognizant Technology Solutions

Symbol: CTSH

Share price: $54.03

Market capitalization: $32.8 billion

52-week high/low: $51.22 - $69.80

Estimated 2016 earnings per share: $3.37

Estimated 2017 earnings per share: $3.70

Price-earnings ratio: 15

Dividend yield: none

The business: Cognizant provides information-technology consulting services, overseeing complex software projects for large companies.

What will drive growth: Global demand for IT services is climbing at an annual pace of 4.6%, according to research firm Gartner. But Cognizant is likely to boost sales at double that rate. Financial and health care companies--its core market--are hiring Cognizant to oversee software development in areas such as social media, mobile technology and cloud-based computing. The firm outsources much of that work to India. But it forges close ties to clients, maintaining about 30% of a project's senior staff on site. Those relationships tend to result in contracts that run longer and are more lucrative than those won by most other IT outsourcing firms, says Morningstar analyst Andrew Lange. Analysts estimate that Cognizant will collect $13.6 billion in revenues in 2016, 32% more than the company generated in 2014. Wall Street analysts expect revenues and profits to rise by more than 10% a year through 2018.

The stock: At 15 times estimated earnings, the shares look cheap, says S&P Global Market Intelligence analyst David Holt. Rating the stock a "buy," he sees it hitting $67 in a year.

Danaher

Symbol: DHR

Share price: $76.45

Market capitalization: $52.8 billion

52-week high/low: $61.60 - $82.64

Estimated 2016 earnings per share: $3.56

Estimated 2017 earnings per share: $3.90

Price-earnings ratio: 21

Dividend yield: 0.8%

The business: Danaher owns 29 businesses, primarily involved in life sciences, dental care, and medical diagnostics.

What will drive growth: A perpetual dealmaker, Danaher has bought and sold more than 400 companies since 1984. It now aims to focus on fast-growing products in health care and life sciences. The firm recently spun off a big chunk of its industrial businesses into a separately traded company, Fortive (FTV), and announced plans to buy medical diagnostics company Cepheid for $4 billion. That follows up on a 2015 deal to buy medical toolmaker Pall for $13.8 billion. The risk with Danaher is that it could overpay for growth. But its freewheeling ways have paid off: Over the past 15 years through September 14, Danaher's shares returned 14.3% annualized, more than double the 6.7% annualized gain of Standard & Poor's 500-stock index (both figures include dividends).

The stock: Analysts see sales climbing 4% to 5% annually over the next two years, hitting $18.3 billion in 2018. Profits should climb faster, though, as Danaher shaves costs and improves the bottom line at companies it buys. Wall Street expects earnings to climb at a 10% annual pace over the next two years.

Fortune Brands Home & Security

Symbol: FBHS

Share price: $57.50

Market capitalization: $8.8 billion

52-week high/low: $64.47 - $44.19

Estimated 2016 earnings per share: $2.74

Estimated 2017 earnings per share: $3.14

Price-earnings ratio: 19

Dividend yield: 1.1%

The business: Fortune Brands makes cabinets, faucets, doors and security systems, under brands such as Moen, Therma-Tru and Master Lock.

What will drive growth: The ongoing expansion of the housing market should lift Fortune's sales for years. The company owns best-selling brands for cabinetry, doors and faucets. It's ramping up manufacturing in the U.S. and recently opened a Moen plant in China to fuel international growth. Fortune also aims to expand with acquisitions; the firm added cabinet maker Norcraft and safe supplier SentrySafe to its lineup in recent years. Even if new housing construction slows, Fortune should benefit from strength in the remodeling market, which accounts for two-thirds of its housing-related sales (excluding its much smaller security business).

The stock: Fortune shares look a bit pricey, trading at 19 times estimated year-ahead profits, compared with 17 for the S&P 500. But the P/E is reasonable given that analysts expect sales to climb 7.7%, to $5.5 billion, in 2017 and see profits rising 14.6%. Fortune's prospects would dim if housing took a dip. But its long-term outlook is compelling, says Chuck Severson, comanager of the Baird MidCap Fund.

Salesforce.com

Symbol: CRM

Share price: $73.82

Market capitalization: $50.1 billion

52-week high/low: $84.48 - $52.60

Estimated earnings per share for the fiscal year ending in January 2017: $0.95

Estimated earnings per share for the fiscal year ending in January 2018 $1.27

Price-earnings ratio: 63

Dividend yield: none

The business: Salesforce sells web-based software that helps companies generate and manage sales.

What will drive growth: Already a powerhouse in subscription-based, online "software-as-a-service" for big businesses, Salesforce is broadening its product lineup and pushing into areas such as data analytics and digital marketing. It's also making acquisitions to fuel its expansion, such as a recent deal to buy e-commerce company Demandware for $2.8 billion. Wall Street expects revenues to top $10.1 billion in the fiscal year that ends in January 2018, up from an expected $8.3 billion in the prior year. Over the next decade, sales should climb by an average 12% a year, says Morningstar.

The stock: Salesforce's shares have been scintillating, soaring more than 11-fold since February 2009. That kind of appreciation isn't sustainable, especially with the stock trading at 63 times estimated year-ahead profits. Nonetheless, Bank of America Merrill Lynch expects the shares to hit $100 over the next year. By 2020, the bank figures, Salesforce could double annual revenues. If the company can achieve that feat, its stock price would likely double by then, too.

Daren Fonda is an associate editor at Kiplinger.

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