7 Stocks to Buy Now
Investors have pummeled some terrific stocks. Here are some picks from Morningstar StockInvestor.
Let's be clear: This market is nuts. Computerized, high-speed trading systems, which account for roughly two-thirds of the market's volume, rarely hold a stock for more than two seconds. Time horizons aren't much longer for many hedge-fund managers and traders at Wall Street investment banks.
That kind of rapid-fire trading is how you get the Dow Jones industrial average to rise and fall 400-plus points four days in a row. Why federal regulators haven’t banned high-speed computerized trading is beyond me. (How? By making it illegal to hold a stock for less than 60 seconds. Such a move would shut down many high-speed traders.)
Don't get me wrong. The selloff reflects real dangers. The euro-zone debt crisis could explode, and fear itself -- caused largely by the selloff -- could push a weak U.S. economy into recession if consumers stop buying and corporate executives pull in their horns further.
But the plunge has created some terrific values for investors who aren’t in such a rush. Few long-term investors are left in the stock market. That gives patient investors an enormous advantage.
Paul Larson, editor of the Morningstar StockInvestor newsletter, quotes Warren Buffett's famous adage: "Be fearful when others are greedy, and greedy when others are fearful." Simple to say; hard to do.
The recommendations in Larson’s letter result in an average holding period of more than four years per stock. Such patience has paid off. Since the authoritative Hulbert Financial Digest started tracking Morningstar StockInvestor ten years ago, the newsletter’s picks have returned an annualized 6.7% -- an average of three percentage points per year better than the broad-based Wilshire 5000 index. The newsletter costs $129 for one year; $219 for two.
Morningstar is known mainly for its fund analysis. But the firm has more than 100 stock and bond analysts, who do a terrific job of sizing up companies. What’s more, their reports are in plain English, in stark contrast to the jargon you find in most brokerage reports.
Larson sorts through the analysts' work and comes up with a list of compelling stocks. Although Larson thinks that whether the U.S. falls into a recession soon is a "coin flip," he recently put together a short list of stocks that he’s pound-the-table sure of. "These are fantastic businesses, and they’re trading at the lowest valuations we’ve seen in several decades, outside of the depths of the 2007-09 bear market," he says. "The valuations of these high-quality companies have compressed since the dot.com bubble burst while their businesses keep growing."
Wal-Mart Stores (symbol WMT) is Exhibit A. Over the past ten years, sales have doubled and earnings have tripled. The stock price? It "has gone nowhere," says Larson. Once a glamour stock, Wal-Mart, which trades at $51.92, sells for 11 times analysts’ anticipated earnings for the coming 12 months (all stock prices and related numbers are through August 16). The firm is growing rapidly overseas. And where else will people shop if a recession materializes?
Here are six more Larson picks in alphabetical order.
At $50.07, Abbott Laboratories (ABT) trades at 10 times estimated year-ahead earnings, a price-earnings ratio "that makes no sense to me," Larson says. The company faces limited patent losses, and it has a strong pipeline of potential blockbusters to add to its lineup of drugs and medical devices.
A publicly traded partnership, Energy Transfer Equity LP (ETE) is the general partner in several oil-and-gas-pipeline limited partnerships. It's currently trying to acquire Southern Union, another pipeline company. At $39.42, Energy Transfer yields 6.3%, making it Larson's favorite income play. Unlike most energy companies, pipeline businesses tend to be pretty stable.
ExxonMobil (XOM), at $73.50, trades at just 8 times anticipated earnings. Certainly, a recession would hurt, but Larson calls it "the most efficient energy company on the planet by far." With oil becoming more expensive to find, Exxon's properties should become more valuable. Exxon has been running neck and neck lately with Apple (AAPL) in the race to claim the title as the world’s most valuable company.
Yes, General Dynamics (GD) and other defense contractors will be hurt by cutbacks in the Pentagon's budget in the coming years. But at $62.04, the stock trades at less than 8 times expected earnings. All the bad news and none of the good news for this cutting-edge firm "are already baked into the pie," Larson says.
Not so long ago, Google (GOOG) was the stock everyone wanted to own -- regardless of price. At the end of 2004, shares changed hands at a staggering 132 times earnings. Today, at $539.00, Google's P/E is just 14. Yet Google's advertising business continues to grow rapidly. "This is a company that might grow revenue at an annual 25% rate the next several years in a good economy and 'only' 20% in a bad one," Larson says.
On August 15, Google used some of its massive cash hoard to make a $12.5 billion bid for Motorola Mobility (MMI), a maker of wireless phones. The deal would give Google some 17,000 patents to help defend its Android smart-phone software from legal attacks. It would also get Google into the intensely competitive hardware business. Morningstar says, however, that the deal would have little effect on Google's value.
Procter & Gamble (PG) is the world’s largest maker of consumer products, with numerous household names, such as Tide, Gillette and Bounty, in its stable. Yet at $61.62, the stock trades at just 15 times forecasted earnings. The company "didn't miss a beat during the recent recession, and I have no reason to believe things would be any worse if we dipped back into recession again," says Larson.
Neither Larson nor I can say where these stocks will be a week from now, a month from now or a year from now. But over the next four years, I think it’s highly unlikely that such high-quality blue chips will remain this cheap. All that's required is patience.
Steven T. Goldberg (bio) is an investment adviser in the Washington, D.C. area. He and some of his clients own shares of Wal-Mart Stores and Abbott Laboratories, and some of his clients own shares of ExxonMobil and Procter & Gamble.