When I’m looking for stocks to buy for my portfolio, I often look at the holdings of top-performing funds. I find that this is a great way to generate investment ideas.
Here, I’m going to highlight three top stocks in Terry’s Smith Fundsmith Equity fund I’d buy today. All of these companies are leaders in their industries and appear to have considerable long-term growth potential.
Microsoft
Let’s start with Microsoft (NASDAQ: MSFT), which is one of Fundsmith’s biggest holdings. It’s one of the largest technology companies in the world.
To my mind, MSFT has all the right ingredients to be a ‘core’ long-term holding. For starters, it has attractive long-term growth prospects. In the years ahead, it should benefit from the growth of the number of industries, including the cloud computing, remote work, and gaming industries.
Yet at the same time, it’s a relatively ‘defensive’ company. People aren’t going to suddenly stop using Microsoft products like Office and Azure if there’s an economic slowdown. Meanwhile, the group has a strong balance sheet and generates an enormous amount of cash.
Of course, MSFT is not risk-free. If we see further weakness across the tech sector, MSFT could underperform. With the stock now trading at 28 times next year’s earnings however, I think it’s a good time to be buying for my portfolio.
Estée Lauder
Next up is Estée Lauder (NYSE: EL). It’s one of the world’s largest skincare and make-up companies.
One reason I like this Fundsmith stock is that its brands provide a strong competitive advantage. When it comes to beauty products, people tend to buy the same brands over and over again.
Another reason I see appeal here is that the company looks set for growth both in the short term and the long term. In the short term, it could benefit as the world continues to reopen and people socialise more. Meanwhile, in the long run, the company looks set to benefit from the ‘premiumisation’ trend – where consumers are happy to pay more for premium products.
It’s worth pointing out that EL does have a relatively high valuation (the forward-looking P/E ratio is about 34). If future growth is disappointing, the stock could fall.
However, it has recently had a near-20% pullback. So I think it’s a good time to start building a position.
Intuit
Finally, I also like the look of Intuit (NASDAQ: INTU) right now. It’s a leading provider of accounting solutions, and the owner of QuickBooks.
There’s a lot to like about Intuit from an investment point of view, to my mind. One key attribute here is that its products are ‘sticky’. Once businesses sign up for an accounting product, they’re unlikely to switch to a competitor, due to the time and costs involved in switching. This means revenues are quite predictable.
Secondly, the company has a strong growth track record, and is very profitable. Over the last three years, revenue has climbed 60% and return on capital employed (ROCE) has averaged more than 30%.
Like MSFT, Intuit could underperform if sentiment towards tech stocks continues to deteriorate. In the short term, this is definitely a risk.
All things considered however, I see a lot of appeal here. After a recent pullback, the stock now trades at 35 times next fiscal year’s forecast earnings, which I think is a very fair valuation.
