3 Top Stocks for the Long Term

In our view, good businesses have competitive advantages. They're tough to beat, whatever market they're in, and they've carved out economic moats that should allow them to generate excess returns for the next decade.

Great businesses, meanwhile, have unassailable competitive advantages--they have wide moats that should allow them to generate excess returns for the next two decades.

And the top businesses are those wide-moat firms that are strengthening their existing competitive advantages and are run by adroit capital allocators.

Finding the best businesses by this definition means zeroing in on firms that do well on three particular Morningstar metrics: they have wide Morningstar Economic Moat Ratings, positive moat trends, and Exemplary Morningstar Capital Allocation Ratings.

The three businesses included here have hit the trifecta. Their stocks may not all be trading in buying range today, but they're certainly stocks to watch. And when trading below our fair value estimates, they're great stocks to invest in.

Here's what our analysts have to say about each business.

Ambev ABEV Morningstar Rating (as of Dec. 21, 2020): ★★★

"Brahma, the Brazilian brewer, was the first foray into the consumer product manufacturing industry by private equity group 3G. In 2000, they merged two Brazilian brewers; Brahma and Antarctica, creating Ambev. The company has gone on to roll up brewers throughout Central and South America and holds several monopolylike positions in large markets, including an 81% volume share in Argentina, 68% in Brazil, and 61% in Peru.

"In part because of the favorable industry structures, and in part because of its 3G heritage, Ambev is a highly profitable business. The company has a well-entrenched cultural focus on cost management, and implemented zero-based budgeting over a decade ago. Ambev's largest market is Brazil, which represented 55% of both total beverage net revenue and EBIT in 2019. Until the current severe recession caused a large contraction in profitability, EBIT margins in Brazil had been at or above 45% since 2010, among the highest in the global beer industry, and while the entry of Heineken to Brazil may limit margin potential, we expect margins to rebound to 38% when the macroeconomic picture improves.

"In addition to its strong focus on costs, Ambev is pursuing a two-prong growth strategy. First, its core markets, with the exception of Canada, offer solid long-term consumption growth opportunities. According to Global Data, annual per capita beer consumption in the low 40 liters is below the global average of around 54 liters. Even in Brazil, Ambev's most mature market outside Canada, annual per capita consumption of 65 liters offers some upside for volume growth. Consumption per capita is generally around 80 liters or more annually.

"Another opportunity for revenue growth lies in the long-term premiumization of the market. Currently, the premium beer segment represents just 5% of Brazil's beer volume, versus almost 15% in Argentina and Chile, and we think Ambev's portfolio of local premium brands, as well as its access to Anheuser-Busch InBev's global portfolio, positions it to benefit from a strong mix effect in the medium term."

--Philip Gorham, director

CoStar Group CSGP Morningstar Rating (as of Dec. 21, 2020): ★★

"CoStar Group built its business by providing commercial real estate data to institutional clients. After achieving pre-eminence in this space, it acquired LoopNet in 2012 and Apartments.com in 2014. These two deals, among several smaller acquisitions, marked CoStar's entry into the fragmented online real estate listing marketplace business. Over the past several years, the company has continued to achieve impressive revenue and profitability growth. We think it is poised to continue this growth trajectory by taking share in the apartment search industry and upselling current LoopNet users to its CoStar Suite platform.

"CoStar has four main business lines, CoStar Suite, commercial property and land, multifamily, and information services. Despite the company's slight shift in focus as it pursues additional growth opportunities, CoStar Suite remains the largest business line, contributing about half of revenue as of year-end 2019. This flagship product contains proprietary data that is sold to institutional players such as brokers via annual subscriptions. We expect future growth to derive from above-inflation price increases, successful efforts to curb password-sharing behavior, and continued cross-selling between CoStar's various products.

"CoStar's second-largest business line is multifamily, contributing over one third of revenue. This business contains apartment-listing platforms such as Apartments.com, ForRent.com, and Apartment Finder, among several others. The LoopNet Premium Lister, BizBuySell, Lands of America, and other related brands are contained within the commercial property and land business line, which is 15% of companywide revenue. Much like the multifamily platforms, CoStar derives its revenue by charging tiered yearly subscription packages in exchange for preferential advertising placement on its platforms. Information services, which contributes less than 10% of revenue, consists of the newly acquired short-term rental business, CoStar Real Estate Manager, and various other miscellaneous products."

--Yousuf Hafuda, analyst

Starbucks SBUX Morningstar Rating (as of Dec. 21, 2020): ★★★

"The global food-service industry has come under pressure as several markets have restricted dine-in service to curb the spread of the coronavirus. Restrictions vary by geography, but even in markets where carry-out and drive-thru orders are still permitted, we expect uneven guest-traffic trends into 2021. Nevertheless, we believe investors should prioritize those firms that have the scale to be more aggressive on pricing near term (value-oriented players have historically outperformed during economic shocks); give their customers greater access/flexibility through robust digital ordering, delivery, and drive-thru capabilities; and have healthy balance sheets (at the corporate and licensed-partner levels). In our view, Starbucks meets the access and balance-sheet investment criteria, and while the company's recovery may lag other industry players owing to reduced morning commute traffic, we believe it is positioned to take market share in a specialty coffee category that will likely be hit harder than many other restaurant subcategories.

"Although it is already the leading specialty coffee retailer in the United States, we believe Starbucks still has meaningful domestic growth potential, including new store formats (including premium destination locations as well as smaller-format pickup stores, drive-thrus, and kiosks), menu innovations (led by cold beverages and better-for-you products), greater peak-hour capacity via Mobile Order & Pay, delivery partnerships, and Starbucks Rewards member acquisition/engagement techniques. Starbucks is much more than a U.S. retail story; it's just scratching the surface of its long-term channel and geographic growth potential. Many of Starbucks' core retail competencies should put it in a position to capture retail and wholesale market share in China (aided by a partnership with Alibaba BABA) and many other emerging markets (bolstered by a partnership with retail tech platform Brightloom). Platforms like K-Cups and Nespresso should facilitate global channel diversification efforts over the medium term, boosted by the Global Coffee Alliance partnership with Nestle."

--Nicholas Johnson, analyst