Investing everything in just one stock isn’t generally a good idea. Instead, it’s usually wise to diversify between shares, sectors, geographies and classes of asset.
However, hypothetically choosing only one share can be a decent exercise to make investors focus on what matters with potential investments. So if I could choose just one share to hold long term, which would it be?
Things to consider
To decide, I’d avoid some of the factors that can contribute to poor long-term returns and added risks. For example, I’d ignore profitless, ‘jam-tomorrow’ enterprises. And I’d shun the operational volatility that can come with some of the smaller listed companies. But avoiding stocks like those two types may mean I miss out when tiny businesses grow to become large ones.
Nevertheless, I’d also be wary of any business with cyclical operations. However, in ruling out the cyclicals, several long-term growth opportunities will be unavailable to me. Indeed, it’s common for multi-bagging stocks to come from sectors such as retailing and hospitality. Sometimes cyclical businesses expand by scaling up a smaller operation and duplicating it in other locations.
Nevertheless, each recession causes some cyclical businesses to fail completely. So I’d be keen to sidestep the risk of picking one of those. And, for me, that means aiming to invest in a business with defensive characteristics instead.
But not any old defensive business will do. Another requirement is for the company to have a strong balance sheet without too much debt. However, defensive operators tend to have consistent inflows of cash whatever the prevailing economic weather. And a good cash performance often leads to a strong balance sheet.
Growth is important
However, the defensive business I pick will need to have an identifiable runway of growth ahead too. The business must have the potential to grow its earnings and cash flow each year, even if it’s only by a little.
And defensive enterprises often grow because they possess 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 own strong brands and command economies of scale. And perhaps the business has good access to capital to reinvest. Indeed, it’s often the case that a combination of factors are present to keep a business secure in its niche.
My sleep-well choice
The company I’d choose for 100% of my cash would be alcoholic beverage company Diageo (LSE: DGE). It’s a big operation with a market capitalisation near £83bn. It’s consistently profitable and defensive because of its powerful brands. The balance sheet is strong with a modest amount of net debt.
Furthermore, the multi-year cash-flow and dividend growth records are things of beauty. And City analysts expect modest, single-digit growth ahead for earnings and the dividend.
However, because of its attractions, Diageo usually sports a high-looking valuation. And that situation adds some risks for investors. On top of that, I may be wrong about the ability of Diageo to keep maintaining its market share and growing its earnings into the future. And I’m not expecting growth to shoot the lights out either.
But if I had to choose only one, I’d sleep well at night owning Diageo shares.
