Six Stocks to Buy and Hold
Elliott Schlang sticks to his knitting. For 40 years, the Cleveland-based Schlang has been tracking stocks of small and midsize companies based in states near the Great Lakes.
His approach has produced sensational results. Since he launched his research service, Great Lakes Review, in 1981, his average stock has returned an annualized 19.6%, compared with an annualized 9.2% return for the Russell 2000 index, which tracks small-company stocks.
In an era of round-the-clock news and fast-trading hedge funds, Schlang is a throwback: a true buy-and-hold investor. His average holding period is nine years, seven months. "We call these Rip Van Winkle stocks," says Schlang, who is affiliated with Soleil Securities Group, a provider of independent research to mutual funds, banks, insurance companies and hedge funds. "With these companies, you should be able to close your eyes for the next ten years."
Schlang isn't a market strategist or economist, but he says he's worried about the stock market. "I'm looking for a very bumpy year," he says. So far, sales and earnings at his top six picks have been relatively immune to the weakening economy, although the share prices of some of them have dropped.
To find these long-term investments, Schlang and his analysts look for companies that dominate an industry niche, have consistent earnings growth, boast high returns on equity (a measure of profitability) and have strong balance sheets and cash flow.
They prefer companies with rapidly growing earnings and more cash than debt on their balance sheets. "Most manufacture their own cash, so they're immune to the banking problems," says Schlang.
He and his colleagues also look for companies that are covered by few brokerage analysts and are owned by few institutional investors.
Finally, they pay close attention to company executives. Here, Schlang's hometown advantage comes into play because he's known the managers of most of these companies for years. He prefers managers with big stakes in their companies.
Three of Schlang's top picks are related to health care and two to consumer products. Below, the list, in alphabetical order.
Alberto-Culver (symbol ACV, $27.62 as of the April 7 close). Despite such well-known beauty-care brands as Alberto VO5, the stock has a market value (share price times number of shares outstanding) of just $2.8 billion. Earnings per share have grown at a 30% annualized rate over the past five years. Profit margins and sales have also risen steadily, and the Melrose Park, Ill., company has no debt and $2.59 per share in cash. Almost half of sales are overseas. "Alberto-Culver has a great name and strong brand recognition," Schlang says.
Ansys, Inc. (ANSS, $36.43) is the worldwide leader in simulation software. The software, which is used by engineers to design everything from pens to automobiles, is so well accepted that repeat business accounts for 65% of Ansys's sales. Despite record sales and earnings last year-and the prospect of setting new records this year, the share price has fallen from $43 since December and now sells at 25 times Schlang's forecasted 2008 earnings of $1.46 per share. But he thinks Ansys's rapid growth justifies the high price-earnings ratio. Over the past five years, the Canonsburg, Pa., company's sales and earnings have increased at more than 30% annualized.
AptarGroup, Inc. (ATR, $40.82) dominates a truly obscure niche: Based in Crystal Lakes, it's the worldwide leader in caps, closures and pumps for consumer products. This includes the caps on toothpaste containers and the pumps on household cleaning products that use sprays. Says Schlang: "Aptar's products are used in virtually everything that has a cap, a closure or a spray. The company uses highly precise micro-technology to spew out nothing but things like toothpaste caps all day." Schlang says the quality and relatively low cost of Aptar's wares discourage consumer-products companies from making their own caps and closures, although they usually make the rest of the packaging. Earnings have grown at 15% annualized over the past five years.
Dentsply International, Inc. (XRAY, $39.71) is the world's leader in dental consumable products. In addition to consumables, such as implants and fillings, the York, Pa., company also makes specialty products for laboratories. An aging population in the U.S. and Europe and growing affluence in the developing world is boosting demand for dental products. Dentsply holds some 2,000 patents and introduces roughly 25 new products every year. Nearly 60% of the company's annual sales of $2 billion comes from overseas. Earnings per share have risen at an annualized 12% over the past five years.
Stericycle, Inc. (SRCL, $52.79). Ready for another boring, obscure company that mints money? Stericyle is the dominant provider of regulated medical waste services -- about 15 times the size of its nearest competitor. The Lake Forest, Ill., company collects, transports and safely disposes of waste from medical facilities around the country. Earnings have grown at an annualized 18% over the past five years, and return on equity is 19%. "Whether we're in a great economy or a rotten one, hospitals will have to dispose of blood, needles and other waste that must be disposed of under stringent regulations," Schlang says.
Stryker (SYK, $65.85), another health-related company, is the largest player in orthopedic implants and related operating room equipment. Earnings of the Kalamazoo, Mich., company have grown at an annualized 25% rate over the past 31 years. More than one-fourth of the shares are owned by insiders, including the founding Stryker family. With a market value of $28 billion (update), Stryker is the only true large company that Schlang follows. It's been on his list for 20 years.
Steven T. Goldberg (bio) is an investment adviser and freelance writer.