The Final Four ... for 2019
There are no underdog stocks here. These seasoned competitors should perform magic over the next ten years.
It's too late to get in on your office March Madness pool, but it's never too late to bet on a few high-caliber stocks. In this market, guessing who will be a winner tomorrow is futile sport. Lengthen your time horizon, though, and it's easy to spot players with the consistency, stamina and sheer muscle to remain at the top of their game for years to come. Eads & Heald, an Atlanta investment firm, recently put together a list of 19 March Madness stocks, each of which it would bet on for the next ten to 15 years.
We asked the firm to whittle the list to its Final Four. It contains no surprise picks or underdogs. Eads & Heald prefer established companies "that have a beautiful, steady earnings history over the past ten years," says Matthew Eads, one of the firm's portfolio managers. The firm's favorites are dominant players in their industries and have manageable or low levels of debt, plenty of cash, and stocks that trade at reasonable prices.
Those priorities would probably strike a chord with Warren Buffett, so it's no surprise that one of Eads & Heald's picks, Johnson & Johnson (symbol JNJ), is a Berkshire Hathaway holding. "It's a leader in health care, and its product base is very well diversified," Eads says. The company is a leading player in everything from pharmaceuticals and over-the-counter medicines to medical devices and skin creams. Johnson & Johnson's medical-technology business, which brought in $23.1 billion in revenues in 2008, is the world's largest.
Another plus, Eads says, is that J&J derives its revenues from all over the globe. Of total 2008 sales of $63.7 billion, it generated $32.3 billion in the U.S. and $31.4 billion abroad. With 13.5% annualized earnings growth over the past ten years, J&J "has probably one of the strongest historical earnings trends in the country," he says. In 2008, the company hiked its dividend for the 46th consecutive year. On average, analysts expect Johnson & Johnson to earn $4.48 per share in 2009. At its April 2 close of $52.97, the stock sells at an unusually low 12 times '09 profit estimates and yields an unusually high 3.5%.
But the Oracle of Omaha's bracket might not include the team's next pick, PepsiCo (PEP). The company is the main competitor of another of Berkshire's longtime stock holdings, Coca-Cola. Pepsi, however, "has just run rings around Coke in the past ten years," says Stewart Eads, president of Eads & Heald and Matthew's father.
He says Pepsi management has a proven record of making shrewd acquisitions. Case in point: its 2001 purchase of Quaker Oats, which brought Gatorade into the Pepsi fold, and its 1998 acquisition of Tropicana Products. By contrast, "Coke's hottest new product today is bottled water," says Stewart Eads. Pepsi also owns snack-food brand Frito Lay, which generated 29% of Pepsi's 2008 sales of $43.3 billion. At $52.86, the stock is off 30% from its late-2007 high, and it trades for 14 times the $3.67 per share that analysts expect PepsiCo to earn in 2009.
Similarly well diversified, and similarly ubiquitous, Colgate Palmolive (CL) is another favorite to go deep into Eads & Heald's tourny. Although the company makes and sells products ranging from Ajax dish cleaner to Murphy Oil Soap, the Colgate product line of toothpaste and toothbrushes is really its crown jewel. Colgate's share of the toothpaste market reached a record high in 2008, claiming 45% of global sales; the brand also nabbed 30% of global manual toothbrush sales. Altogether, oral-care products accounted for 41% of the company's $15.3 billion in total sales for 2008 .
The Eads & Heald team likes the recession-resistant qualities of Colgate's products. "It sells products that are almost by definition necessities," says Tom Heald, a vice-president at the firm. And the stock has been a relative safe haven -- its 27% drop from its late-2007 high of $81 is a far throw from the 47% plunge of Standard & Poor's 500-stock index from its 2007 high. At $61.23, Colgate sells for 15 times the $4.21 per share that analysts, on average, expect the company to earn in 2009.
Consumer products isn't the only sector Eads & Heald favors. United Technologies Corp. (UTX) makes high-tech industrial equipment for buildings and aerospace. The company's Carrier line of heating, air-conditioning and refrigeration equipment is its largest business, accounting for 25% of 2008 sales of $58.7 billion. Its Pratt & Whitney brand (aircraft engines and gas turbines) and its Otis brand (elevators and escalators) each account for 22%. Other business lines include Sikorsky helicopters and fuel-cell systems.
The company hasn't been immune to the recession. Analysts figure that United Technologies earned $0.78 per share in the first quarter. That would represent a 24% decline from the first quarter of 2008. The firm is downsizing by some 11,600 employees and spending $750 million on restructuring to cope with the downturn. For the full year, analysts expect United Technologies to earn $4.20 per share, which would be 14% off its 2008 profits, and they don't expect earnings to fully recover until 2011. But still, "It's got a diverse product line," says Tom, and one of its top customers is the U.S. military, "which isn't going anywhere." Not to mention that in 2008 the company hiked its dividend for the 15th straight year. At $45.94, the stock trades at a price-earnings ratio of 11 and yields 3.4%.