3 blue-ribbon stocks on sale
Posted
Sep 03 2009, 04:48 PM
by
CAPS Editor
Rating:
This post comes from Morgan Housel at partner site The Motley Fool.
Even with the recent rally, it's ugly out there. Many companies that overleveraged their balance sheets are permanently impaired and will likely never fully rebound. Citigroup (C) and Fannie Mae (FNM) come to mind.
We had an unprecedented boom; now we're slowly trying to claw out of an unprecedented bust. That's how markets work.
Even so, history tells us that market panics and forced sell-offs indiscriminately throw the good out with the bad. The "sell-now-ask-questions-later" mood of global investors is providing bargain-hunting investors with the sort of opportunities we haven't seen in decades. Use that to your advantage.
I've consulted with MSN CAPS, the investment community organized to help individuals beat the market, to hunt down a trio of dirt cheap, high-quality companies.
Bing: What does MSN CAPS do?
Each has a four-star rating at CAPS. While top-rated five-star stocks obviously have bullish consensus, we've found that stocks moving up from three stars to four are likely being driven by "smart money." By getting in early, investors may be able to eke out a few extra percentage points of gain from these equities. So it's worthwhile to sift through the CAPS database to find four-star companies that could be on the cusp of achieving a bullish consensus among investors.
Have a look:
Consolidated Edison (ED) delivers electricity to more than 3 million residences and businesses in New York City, and natural gas to more than 1 million customers. The company has a 7% return on equity over the trailing 12 months and a five-year expected growth rate of 3.4%. The stock has dividend yield of 5.9% and trades at a forward price-to-earnings ratio of 12.
Merck (MRK) is one of the nation's biggest pharmaceuticals companies, and it's getting bigger -- it has agreed to acquire New Jersey neighbor Schering-Plough (SGP) for $41 billion. Merck has a 28% return on equity over the trailing 12 months and a five-year expected growth rate of 3%. The stock has dividend yield of 4.8% and trades at a forward price-to-earnings ratio of 9.
Automatic Data Processing (ADP) helps about 580,000 clients worldwide meet payroll, file taxes and manage data. The Roseland, N.J., company has a 23% return on equity over the trailing 12 months and a five-year expected growth rate of 11.3%. The stock has dividend yield of 3.5% and trades at a forward price-to-earnings ratio of 15.
Let's break down the bullish argument for each one.
Still in a defensive mode
Sure, an electric utility is as boring as boring comes. But a company like Con Edison is quite stable, and pays an enormous dividend of nearly 6%. Safe returns of this magnitude should not be belittled, especially in times like these.
As CAPS member "risenodoz" wrote about the company:
"Safe play, with dividend. Tri-state area (New York, New Jersey, Pennsylvania) is in no rush to deregulate utilities. With liberals (most likely) in control of the country for the next 4-8 years, they should be a safe bet to continue to hold on to their monopoly."
Analyst Brian Chin at Citi Investment Research recently raised his price target on Con Edison shares by $3 to $43 and said that economic data suggests an industrial recovery is nearing, which could justify a more risk-tolerant stance among utility investors.
Real reform starts here
Death panels! Socialism! The end of free choice! The end of the world!
These talking points are good for town hall debates and the cable news networks. They're also good for scaring the pants off of health care investors, some of whom want nothing to do with the industry until the smoke clears. But whatever landscape emerges from health care reform is likely to be advantageous to drug companies like Merck.
Merck's pipeline stinks, which makes the growth crowd squirm. Fair enough. But much of this is already priced into a stock trading at nine times earnings and spitting out a 4.8% dividend.
As CAPS member "saunafool" wrote last year:
"No matter what happens to the economy, people are still going to take their medicines. All these (drug) companies are going to survive the turmoil better than most, and they'll still be standing, just like Elton John, 10 years from now, with compounded dividends aplenty."
Merck is reorganizing ahead of the Schering-Plough acquisition to try to take advantage of opportunities in such high-growth areas as emerging markets, biologics and vaccines.
Putting money to work
How much worse will unemployment get? That's what investors want to know when evaluating Automatic Data Processing. The payroll processor will be among the beneficiaries when companies stop shedding workers.
Some might say that at 15 times forward earnings, shares of ADP aren't cheap. But you have to put value in perspective: ADP, along with smaller rival Paychex (PAYX), virtually controls the market for outsourced payroll processing and benefits administration. They generate staggering returns on capital. It's worth paying a premium for companies like these.
Have your own take on any of these companies? More than 135,000 investors use CAPS to share ideas and swap opinions. Click here to check it out and speak your mind. It's 100% free to participate.
Morgan Housel did not own or control shares of any company mentioned in this article.
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