Readers may be familiar with the saying of owning stocks that you can 'put in the bottom draw'. In case you're wondering what this old saying refers to – it is basically referring to a company of such high quality that you could effectively lose the share certificate in the proverbial draw of your desk. These types of stocks should be able to go unchecked for years and when you do 'find' that share certificate years later, the stock would have provided you with a reasonable return – at least in line with the performance of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
Essentially, stocks meeting this 'bottom draw' test for long-term investment would have a number of attributes including being large, entrenched businesses with defensive revenue streams. They would be dividend payers and not be perceived as at risk of structural decline. Importantly, they should also be acquired at a reasonable price – as paying an excessive price could be a major drag on long-term performance.
Here are three stocks which could arguably all be placed in the bottom draw.
- National Australia Bank Ltd. (ASX: NAB) – as one of Australia's four largest banks there would be little argument as to the entrenched nature of the group. There would also be little argument that the need for banking services will continue, although the delivery of those services could certainly change. Data provided by Morningstar suggests relatively steady earnings and dividends per share over the next few years and that the stock is currently priced on a price-to-earnings ratio below the sector average.
- Suncorp Group Ltd (ASX: SUN) – as one of the largest insurers in Australia, the group holds significant entrenched market share. Like banking, insurance can also be viewed as a 'forever' industry with little prospect that insurance services will ever become obsolete. Morningstar's data suggests earnings per share will grow over the next few years, while dividends will decline slightly. With the stock trading at a discount to its peer group, now could be a buying opportunity.
- IOOF Holdings Limited (ASX: IFL) – a third industry which has a relatively positive outlook in terms of the sustainability of demand for its services is financial services. As one of the leading providers of financial advice and related services, the long-term earnings power of IOOF appears positive. With the stock trading in line with its sector peers, IOOF is a third stock which could potentially be safely stored away in the bottom draw.
