Tyler Crowe, Matthew DiLallo, and Reuben Gregg Brewer, The Motley Fool
Updated
Ever since Apple(NASDAQ: AAPL) issued the iPhone 10 years ago, the stock has been on an absolute tear and has become one of the greatest wealth-generating stocks of the past century. A high-demand product with a brand that commands incredible pricing power has turned Apple into a cash-flow machine that churns out returns on equity in excess of 30% without breaking a sweat.
These are the kinds of investing wins you want to replicate if you want to generate wealth over the long term, but finding them isn't always easy. Remember, the first iPhones weren't met with the messianic zeal that each new iPhone does today. So we asked three of our investing contributors to each highlight a stock that they think might have an Apple-like run in them over the next decade. Here's why they picked Tellurian(NASDAQ: TELL), Centennial Resource Development(NASDAQ: CDEV), and A.O. Smith(NYSE: AOS).
Person pointing at stock chart with an upward trajectory.
Image source: Getty Images.
Improving on a successful blueprint
Tyler Crowe (Tellurian): It's a lot easier to improve upon something after you've done it once and been able to reflect on the right moves and missteps along the way. It's incredibly rare in business to hit the reset button and start all over from scratch. That is, however, what the management team at Tellurian hopes to do with its Driftwood LNG export facility.
Tellurian was formed by Charif Souki and several members of his former management team at Cheniere Energy. When he was unceremoniously booted from the CEO position back in 2015, he had taken what was a pipe dream -- exporting liquefied natural gas from the U.S. -- to what we could call a first-and-goal situation. It had locked up more than 80% of its production capacity under long-term, fee-based contracts that insulated the company from commodity prices, acquired billions in financing for a speculative project, and was about to complete construction on the first liquefaction train when he was booted from the C-suite.
Now, Souki and his team is looking to do it again, but this time they have the experience of doing it once before to guide their decision-making process. Tellurian has already signed up some heavy-hitters as equity partners -- General Electric and Total -- and is planning to use a new liquefaction process that's slated to be one of the lowest-cost-per-ton facilities out there. Management is also looking to vertically integrate along the LNG value chain by investing in some LNG tankers as well as some low-cost natural gas production acreage in the Haynesville shale region.
Tellurian is still a speculative project that needs to lock production up with contracts and receive approval for natural gas export from the Federal Energy Regulatory Commission. This time, though, management can lean on the experiences it had at Cheniere to improve on what has so far been a rather successful blueprint. Based on where Tellurian's stock trades today, it has a chance of an astronomical rise over the next decade.
Hitting the accelerator
Matt DiLallo (Centennial Resource Development): Little-known shale driller Centennial Resource Development wants to be the best-performing oil stock over the next several years. Fueling its ambitious plan is the company's ultra-low-cost position in the red-hot Permian Basin. The company estimates that it has the resources -- both oil in the ground and financial -- to grow its production from just 5,700 barrels per day (BPD) last year up to 60,000 BPD by 2020.
Centennial Resource Development is already well on its way toward achieving its bold plan, since it's on pace to boost production 215% this year to 18,000 BPD. That's about 14% ahead of its initial guidance because of stronger-than-expected well results after it made several positive adjustments to its drilling process.
This initial burst of production has already fueled more than 100% gains for investors since the stock made its debut in early 2016. However, while they missed that initial pop, there should still be plenty of upside ahead as Centennial continues drilling high-return shale wells. Overall, the company expects that its current plan will grow debt-adjusted production per share -- which is a metric that levels the playing field with peers that are using leverage to accelerate their growth rate -- by a 71% compound annual rate through 2020. That's nearly double the projected growth rate of its rivals and should help Centennial to vastly outperform them and potentially enable investors to rack up Apple-like gains.
Reuben Gregg Brewer (A.O. Smith): Maybe A.O. Smith isn't exactly like Apple in 2008, but this water-heating equipment maker is definitely at the leading edge of a key industry. You take hot water for granted, but in developing nations it's still a luxury. As countries such as China and India step up the socioeconomic ladder, demand for boring old water heaters materially increases.
In China, where Smith has been operating for a while now, compound annual sales growth has averaged 22%! And it's still growing in this giant nation. But A.O. Smith is also pushing into India, with plans to follow a business model similar to the one it successfully executed in China. That could lead to another burst of top-line growth over the coming years, since this emerging economy isn't as far along in its economic progress as China. It's pretty exciting stuff -- for water heaters, anyway.
That said, A.O. Smith's primary markets today are in North America. This region accounts for roughly 65% of sales and provides a reliable foundation for expansion. China makes up most of the rest of the manufacturer's business. As growth in India starts to kick in, however, look for the mix to continue to shift toward the East. And look for revenue, earnings, and dividends -- the company has increased its disbursement for 24 years in a row -- to keep growing.
Matthew DiLallo owns shares of Apple and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and short January 2018 $24 puts on General Electric. Reuben Gregg Brewer has no position in any of the stocks mentioned. Tyler Crowe owns shares of A. O. Smith, Apple, General Electric, Tellurian, and Total. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
