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All Contents © 2017The Kiplinger Washington Editors
There’s nothing wrong with boring stocks. In fact, there’s a lot right with boring stocks. While more scintillating names get the media coverage and investor attention, a number of steady-Eddie stocks to buy offer consistent appreciation (and often substantial income) for years, if not decades, while staying under the radar.
In fact, Warren Buffett, likely the world’s most well-known and successful investor, has made billions of dollars on what many individual investors would consider “boring” stocks.
Look at the list of Berkshire Hathaway Inc. (BRK.A,BRK.B) holdings: There’s GEICO and other insurance names. T-shirt company Fruit of the Loom. Dairy Queen and See’s Candies. Chemical company Lubrizol and railroad Burlington Northern Santa Fe. These companies don’t scream “growth” — really, they don’t scream much of anything — but it’s hard to argue with the Oracle’s performance.
Investors looking to replicate Buffett’s impressive long-term performance can start by looking at boring stocks of their own. In that spirit, here are 10 stocks to buy that might not be the next Tesla Inc. (TSLA) … but should have plenty of upside.
Prices and data are from the original InvestorPlace story published on May 31, 2017. Click on ticker-symbol links in each slide for current prices and more.
By Vince Martin
| June 2017
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Courtesy Unum Group
Disability insurance provider Unum Group (UNM) has been around since 1848, and should be around for at least another century.
The Affordable Care Act (colloquially known as “Obamacare”) has impacted U.S. operations, and the “Brexit” has hurt the dollar-denominated profits from a smaller U.K. business. Yet Unum has continued to grow profits and book value, with adjusted EPS rising 8% and adjusted book value climbing 9% in 2016.
A nice first-quarter beat, plus an increased dividend and share repurchase plan, means 2017 is off to a good start as well.
Despite that performance, UNM stock still looks very reasonably valued. A roughly 10% pullback from early March highs leaves Unum Group at about 11 times 2017 EPS estimates, and at just a 10% premium to book value. With the company guiding for mid-single-digit profit growth this year, a solid market position and a roughly 2% dividend yield, the valuation looks simply too low at the moment.
UNM stock isn’t likely to double in a year, but above-market performance seems awfully likely given the current valuation. Indeed, Unum Group has already been one of the most consistent stocks to buy for some time, besting the S&P 500 over the past one-, three-, five- and 10-year periods, and it should continue to do so going forward.
Tech Data Corp. (TECD) is about as far from a classic high-growth, high-valuation tech play as you can get. The company distributes IT products worldwide, a tough — but undercovered — business. Operating margins are razor-thin: just 1.29% on a non-GAAP basis in the company’s fiscal 2017 (ending January).
But Tech Data has a multidecade history of success in its space, and benefits from a major deal on the way. In March, the company closed on the $2.6 billion purchase of Avnet, Inc.’s (AVT) Technology Solutions division. The deal boosts Tech Data’s scale, and gives it a stronger presence in both Asia and in data center products — two key areas of growth for tech going forward.
The acquisition also will have a substantial impact on TECD earnings. With the company guiding for $100 million in cost savings by year two — as much as $2 per share after-tax — Tech Data has a clear path to $10-plus in EPS. Yet the stock trades at just $95, implying a potential single-digit multiple to FY19 earnings, with incremental benefits from the acquisition likely over the long-term.
There are risks here, particularly as hardware and networking equipment sales slow worldwide. Obviously, TECD is hardly the stereotypical “hot” tech stock. But that doesn’t mean it doesn’t have value, or more upside. And with the Avnet acquisition likely to provide a big boost over the next two years, investors who look beyond tech’s best-known names could find an underappreciated winner.
Courtesy AVX Corporation
AVX Corporation (AVX) is a major part of the connected world, but few investors know it. The company manufactures electronic components including capacitors, which are used in end markets ranging from automotive to defense to personal computers.
It’s a relatively tough business, with many smaller manufacturers around the world, along with primary rival Kemet Corporation (KEM). Results tend to be cyclical: AVX earnings increased in FY17 (ending March), but declined in each of the past two years. As in the semiconductor industry, pricing tends to decline over time. That pressure has impacted long-term performance as well. All of AVX’s shareholder returns have come through dividends, as the stock actually has declined almost 8% over the past decade.
But there’s reason to see potential upside for this seemingly boring stock.
Kyocera Corp (KYO) owns 72% of AVX — a stake that has limited AVX’s flexibility relating to share repurchases. But Kyocera’s decision to bring sales of its products in-house could foretell a change in its ownership of the company. AVX itself continues to target an acquisition of its own. More than $6 in cash per share is mostly held overseas. On a relative basis, this company would be one of the largest beneficiaries of a potential repatriation holiday.
Meanwhile, the cycle looks to be turning in AVX’s favor. Results — and management sentiment — are improving each quarter, including a solid Q4. Longer-term, autonomous driving and the internet of things both imply higher demand for AVX products. The fortress balance sheet provides some downside protection, and technological advancements provide potential growth.
With some help from either Kyocera and/or the U.S. government, AVX stock could break out.
Crown Holdings, Inc. (CCK) is one of the most classically boring stocks to buy, and it’s also a cheap one.
The company’s primary business is making aluminum cans for much better-known customers like The Coca-Cola Co. (KO), Anheuser Busch InBev NV (BUD), Heineken N.V. and PepsiCo, Inc. (PEP), among many others.
Yet while investors value those stocks at 20x-plus earnings, CCK trades at under 15 times the midpoint of its 2017 guidance. That’s despite the fact that Crown’s earnings actually are growing faster than those of major customers (KO most notably). Competition is stiff, with Ball Corporation (BLL) leading the market after its merger with Rexam closed last year. A spike in aluminum prices could cause some near-term disruption as well.
But the valuation disconnect between Crown’s business and that of its chief customers is too large. And it seems at least partially because investors simply aren’t as familiar with Crown as they are with its world-famous customers. That creates an opportunity to buy a 90-year-old business at a nice discount — and benefit from what should be years of rising demand.
It’s hard to imagine a stock more boring than that of a company that makes air. But that’s the case at Air Products & Chemicals, Inc. (APD), which produces gases such as oxygen, nitrogen and hydrogen for industrial applications.
That said, the APD story has become a bit more interesting of late.
The company has undergone a five-point transformation over the past few years. Air Products spun off its Electronic Materials business into Versum Materials Inc (VSM). It’s focusing on operational efficiencies in its existing business. Those efforts appear to have more potential impact after a Q2 where even management admitted productivity could improve.
In addition, APD has about $8 billion in excess cash to be invested, whether into the business or in shareholder returns. That could lead to an increase in the dividend, which currently yields 2.6%, or an expanded share repurchase.
APD stock isn’t the cheapest stock to buy right now, at more than 23 times guided 2017 EPS. But with plenty of room for organic improvement, and exposure to an improving industrial sector, there’s room for more upside.
While selling air might not sound sexy, Air Products has built a $30 billion business doing exactly that. And that business should drive more upside in the future.
DST Systems, Inc. (DST) has established a solid niche in the financial services and healthcare industries, though you’ll never really see it, as it has an extensively background role.
In financial services, DST Systems does everything from transaction processing to trade reconciliation to investor reporting. In healthcare, it provides claims and benefit management, along with payment processing and even business intelligence.
The advantage for DST is that it becomes quite literally embedded in the operations of its customers. That in turn creates high switching costs and high customer loyalty. According to the company’s most recent presentation, its top five financial services customer relationships have lasted an average of 20 years. The figure is 19 years in healthcare.
As a result, DST has driven steady net income growth, save for a weak 2015. Yet DST stock hasn’t gained all that much of late. In fact, it trades below 2015 levels. Consider this: DST is valued at roughly 18 times 2017 EPS estimates, despite predictions of double-digit earnings growth this year and next. That’s too cheap. And a hiked dividend and a 2-for-1 stock split could boost the stock in the near term.
DST Systems might have a market cap of nearly $4 billions, but too few investors even know what the company does. That’s likely why the stock is so undervalued.
Jnn13 via Wikimedia
MetLife Inc. (MET) isn’t without its problems. Disappointing 2017 guidance was driven by concerns overseas. Tax rate changes in Japan and political pressure in Chile both are impacting near-term results. Confusion and concern around its “too big to fail” designation similarly has pressured the MET stock price.
But this insurance and annuities outfit has been through much, much worse in its 150-year history, and the mid- to long-term outlook still seems reasonably bright.
Higher interest rates will help returns on Metlife’s float, and the rising stock market should provide a tailwind on that front as well. Besides, MET simply looks too cheap at this point. The stock trades at less than 10 times 2017 EPS estimates, and 0.82 times book value. The near-term concerns aren’t immaterial, but they look more than priced in.
One of the world’s largest and most successful insurers is available at a discount. That’s exactly what you should be looking for when hunting down boring stocks to buy.
Erik Drost via Flickr
Utilities are the most classically boring stocks in the entire market. Safe, dependable, and defensive, utility stocks are a favorite of income investors. They’re also hardly the types of stock to provide stimulating conversation — or produce notable returns.
But steady appreciation and reliable dividends have real appeal to investors with a long-term horizon. And even in the utility space, bargains can be found on occasion.
Such appears to be the case at the moment with FirstEnergy Corp. (FE), which is admittedly the most exciting thing going on in the utility space right now. (That’s not saying much.)
FirstEnergy is pressing for Ohio state legislators to fund subsidies for two nuclear power plants in the state. That effort has been paused for the time being — and news of that pause helped drive FE stock to a 14-year low.
But FE stock now yields just under 5% — and it seems no coincidence that the stock bounced quickly after clearing a 5% yield last week. A political loss hardly means the end of FirstEnergy’s business, and the stock trades at just 10 times the midpoint of 2017 earnings guidance after a Q1 beat.
As far as utilities go, FE stock probably is riskier than most. But a 10x multiple and a 5% yield for a business that should create profits for years to come seems to have priced in those risks, and then some.
Courtesy American Water Works
On the other end of the utility continuum is American Water Works Company Inc. (AWK). The country’s largest water utility, American Water Works has 15 million customers in some 47 states.
American Water Works has managed to grow much more quickly than most utilities, in large part due to its M&A strategy. The company generally seeks out struggling municipal water authorities, offering much-needed capital for upgrades and maintenance.
That strategy has led AWK stock to nearly quadruple since its April 2008 IPO. In fact, at this point, the only concern might be valuation. The stock trades at more than 25 times the midpoint of 2017 EPS guidance — a hefty multiple for the utility space, and a premium to second-place peer Aqua America Inc. (WTR).
Still, investors generally have to pay for quality, and further execution on the M&A front and the ever-increasing demand for water across the country both imply additional longer-term upside. A 2%-plus dividend — recently raised by more than 10% — helps the bull case as well.
Utilities might generally be boring, but AWK has proven that even a seemingly boring company can drive impressive growth.
JeepersMedia via Wikipedia
In this day and age, you could make the case that there are no more “boring” bank stocks. Certainly the days of “3-6-3 banking” — offer 3% on deposits, lend at 6%, be on the golf course by 3 p.m. — are over. Regulatory changes and the combination of consumer and investment banking operations have altered the industry for good.
But among banking majors, Bank of America Corp. (BAC) still hews closest to the old-line banking model.
Its Merrill Lynch unit does give exposure to investment banking and more volatile trading profits. But strong results of late have been driven by steady improvements in the core consumer banking business. Charge-offs have declined, and net interest income is benefiting from higher rates.
BofA is steadily and incrementally improving its operations, and its profits. That might sound like a “boring” strategy, particularly relative to other mega-cap financial stocks. But in this case, that’s a good thing. Wells Fargo & Co. (WFC) has its ongoing account scandal. Goldman Sachs Group Inc. (GS) has a much greater exposure to lumpy and sometimes volatile trading and investment banking revenues. JPMorgan Chase & Co. (JPM) is probably the closest to BofA’s model, but even its non-consumer profits are bigger on a relative basis.
In its space, Bank of America’s business model probably is a close to “boring” as a multinational financial company can get. So far this year, that business model has led BAC stock to outperform its rivals. And I expect that to continue going forward.
This article is from Vince Martin of InvestorPlace. At the time this article was published, he held none of the aforementioned securities.
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