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Stocks may be risky, but sticking with established businesses can boost your chances of success. Here are seven stocks to consider.
Long-distance runners may never beat sprinters in the 100-yard dash, but picking stocks that have more stamina may help you win the investment race.
While Wall Street typically focuses on the next quarter or two, what really matters for long-term investors is a stock's performance over several years. A strong economy lifts most stocks, but it takes a durable business with strong competitive advantages to power through the tough times.
Granted, most companies falter when the economy weakens. But companies heading into a slowdown from a position of strength are likely to re-emerge healthier. If they pay dividends, investors can earn some cash along the way. And sticking with these stocks is more likely to generate stronger returns over many years than investing with a short-term mindset, according to some money managers.
"We look for companies with proven business models and a good deal of longevity," says Eric Marshall, co-manager of the Hodges Small Cap Fund (HDPSX). "The big money is usually made in the third or fourth year of owning a stock."
Of course, owning stocks is inherently riskier than investing in diversified mutual funds or ETFs. In either case, you face market risk: the chance that the market sells off. But with stocks, there's also the risk the company goes off course, adding another layer of uncertainty.
"You should try to buy the least risky stocks that still have attractive qualities," says Ernesto Ramos, co-manager of the BMO Low Volatility Equity Fund (MLVYX). Low-risk stocks, he says, have below-average volatility or "beta." And while they may not be flashy growth companies, they tend to have stronger balance sheets, pay a decent dividend and offer more earnings visibility — features many investors now prize highly.
With that in mind, we asked some money managers for their best long-term picks: stocks they'd feel comfortable holding for at least the next five to seven years. Keep in mind, the following stocks trade near their 52-week highs and could sink if the market declines. Some are more conservative; others are riskier but offer greater growth potential.
In either case, you should invest gradually over a period of weeks or months. As always, it's a good idea to see how these stocks fit with the rest of your portfolio and do your own research or consult an adviser before investing.
Kimberly Clark (KMB) makes Kleenex tissues, Huggies diapers and other household goods. It isn't a hot business; the company targets sales growth of 3% to 5% a year. Still, its brands are top sellers in more than 80 countries, and the business is growing faster in developing markets where consumer income is rising, says the fund manager Ramos, who owns shares in his low-volatility fund.
Granted, "it's not a sexy story," says Ramos. But the stock isn't volatile, and the company is solidly profitable with a 36% return on equity — higher than in recent years, according to Thomson Reuters. The Dallas-based company also boosted its dividend an average 9.5% a year over the last decade and the payout looks secure, accounting for just 60% of earnings — a relatively low payout ratio.
The downside: The stock trades at a premium to the S&P 500 (.SPX) and looks pricey relative to its earnings growth rate. Ramos suggests waiting for a pullback before buying shares.
McCormick (MKC) started selling root beer out of a Baltimore cellar in 1889 and is now the world's largest spice company with more than $4 billion in annual sales. The Baltimore-based company has grown earnings per share every year since 2006 and hiked its dividend at a 9.1% rate over the past five years.
While sales aren't growing much in the U.S., developing markets are thriving. The company expects to get 20% of sales from the developing world in 2015, up from 14% in 2012. That's one good reason to own the stock, says Mark Freeman, co-manager of Westwood LargeCap Value Fund (WHGLX), which owns the shares.
Further, McCormick has pricing power. Most households don't buy spices often so they're not highly sensitive to the price, says Freeman. "Warren Buffett bought Heinz for similar reasons," he says. "This isn't a company to own for the next seven years, it's for the next 70 years."
The downside: The stock isn't cheap, with a high price-to-earnings-growth ratio around 2.0, according to Thomson Reuters.
In the financial sector, State Street (STT) has a stunning $24.4 trillion in assets under custody and administration, including $2.1 trillion in assets under management. Investors may be familiar with its SPDR ETFs. But the firm also offers an array of other investment products along with services for hedge funds and other big investors. Revenues edged up 2.4% to $9.7 billion last year and earnings grew 5.9% to $3.95 a share.
The bank, based in Boston, should benefit over the long term from rising asset prices and the growth of financial services, says Michael Cuggino, manager of the Permanent Portfolio Fund (PRPFX), which owns the stock. State Street is well-capitalized, he adds, and most of its income is fee-based, providing steadier profits and less risk of asset write-downs than traditional banks incur.
"It's a well-managed business with a healthy dividend yield that's seemingly supported by earnings," he says.
The downside: The bank earns about a quarter of revenue from interest income and profits could be weaker than expected if rates stay low. Sales and profits would likely fall if financial assets sell off broadly and profits could face pressure if the heavily regulated, "too big to fail" bank is required to hold more capital under pending rules.
French drug maker Sanofi (SNY) saw several of its branded drugs lose patent protection in 2012, causing profits to tumble nearly 14%. But growth is picking up now that Sanofi is moving beyond the "patent cliff," says Ben Kirby, co-manager of the Thornburg Investment Income Builder Fund (TIBCX), which owns the stock.
Sanofi bought biological drug maker Genzyme in 2011 to boost its drug portfolio. It also has a strong animal-health division, which grew sales 3.1% last year, and a vaccine business that climbed 5.7%.
One reason Kirby likes the stock: Sanofi's exposure to emerging markets. The company gets a third of sales from developing countries and revenues in those markets grew 8.3% last year, helping offset weakness elsewhere.
"Sanofi will beat the market over the next seven years and do so without a lot of heartburn," he predicts.
The downside: Sanofi's drug pipeline is considered relatively weak, says Kirby. Drug companies face price pressure from insurance companies and government reimbursement programs. The company is based in Paris and the stock could decline due to currency fluctuations or a sell-off in the French stock market.
Another drug maker to consider is Amgen (AMGN), based in Thousand Oaks, Calif. Sales of the company's two main products, anemia drugs Epogen and Aranesp, have slowed in recent years. But sales appear to have stabilized and new drugs are starting to pick up the slack, says Tom Forester, head of the Forester Value Fund (FVALX), which owns the stock.
While Amgen faces rivals for its anemia drugs, it's more insulated from generic competition than traditional drug makers. The company's biological drugs are complex "large molecule" medicines that aren't easy to duplicate after they lose patent protection, notes Forester. Though sales may slide a bit, he thinks Amgen should be able to protect most of its sales and profits.
Wall Street expects earnings per share to jump 13.7% next year, giving the stock a P/E ratio of 14.3 that looks reasonable, says Forester, especially if you deduct the company's $28 a share in cash.
The downside: Lower reimbursements from Medicare and insurance companies could pressure profits, and Amgen's anemia drugs could face stiffer competition.
Chevron's (CVX) P/E ratio around 10 is 32% below the S&P 500's forward P/E of 14.6. Some of the discount reflects uncertainty about global energy demand, which isn't looking strong. But Forester, for one, thinks Chevron has good growth prospects.
For one thing, it's ramping up sales of liquid natural gas (LNG) in Asia, where demand is expected to rise. Japan plans to use more LNG to power its electric utilities, notes Forester. And Chevron is on track to be one of the largest LNG suppliers in Asia over the next seven years.
Overall, Chevron's oil-and-gas production should increase 4% next year, notes Barclays analyst Paul Cheng, and the San Ramon, Calif.-based company expects to replace more than 100% of its reserves over the next few years. The dividend, meanwhile, looks solid: Chevron boosted it an average 9.2% over the last five years, and it accounted for just 26% of profits in its last fiscal year.
The downside: A prolonged slump in oil and gas prices would erode sales and profits.
Kinder Morgan Inc. (KMI) owns stakes in several master limited partnerships (MLPs) that operate natural gas pipelines, terminals and other "energy infrastructure" assets. These MLPs are fee-based businesses that are like toll road operators, storing and transporting energy products for oil and gas producers.
They're benefiting from rising domestic energy production, and they offer good potential for total returns, says the fund manager Freeman, who owns shares of Kinder Morgan Inc. in the Westwood Income Opportunity Fund (WHGIX).
One benefit of owning Kinder Morgan Inc., based in Houston, is that it's a corporation rather than an MLP. The stock yields 3.9%, a bit lower than the distribution rate of its MLP investments. But investors don't have to deal with the complex K-1 forms issued by MLPs. Plus, the company should receive a growing share of distributions from its MLPs, ultimately passing them on to shareholders, says Freeman.
The downside: A steep rise in interest rates would likely pressure the stock. Lower energy prices would impact profits.
Daren Fonda is Senior Writer and Investing Columnist with Fidelity Interactive Content Services, a provider of objective investing content on Fidelity.com. He does not own any of the securities mentioned in this article.
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