7 stocks to buy and hold
Value investors seek companies with superior returns over the long haul, like McDermott International.
By Matt Koppenheffer, The Motley Fool.
Investments that have been successful over the long term almost assuredly share at least one trait: growth. Few companies produce good returns for shareholders without reliably increasing their earnings.
Think about it this way: Dividends aside, investors reap their gains when a company's stock price goes up. The stock price is typically driven by two levers: earnings and the multiple that investors are willing to pay for those earnings.
Since earnings multiples tend to fluctuate within a certain range, long-term investors should have a keen focus on the company's ability to increase earnings.
Does that seem too simple? Maybe keeping it simple is sometimes a good plan. After all, as investor Martin Whitman, manager of Third Avenue Value Fund (TAVFX), has put it:
"Based on my own personal experience, both as an investor in recent years and an expert witness in years past, rarely do more than three or four variables really count. Everything else is noise."
With that in mind, I've dug up seven stocks that analysts expect will notch long-term earnings growth of 10% or better. I've also pulled up the CAPS rating for each stock to show what the 145,000-member MSN CAPS community thinks of each company's prospects.
EBay (EBAY) provides an online forum for selling merchandise. But the ancillary businesses are the engines for its impressive growth. User registration at eBay's PayPal online payments unit has been expanding at double-digit rates in recent quarters. Its Skype service for making telephone calls over the Internet posted a 63% rise in international calls in 2009. EBay last year sold 70% of Skype for $2.75 billion, money it wants to use to help meet its goal of becoming the world's most efficient marketplace. Analysts project a long-term growth rate of 15% for the San Jose, Calif., company. The stock trades at a forward-price-to-earnings ratio of 14.7 and has a three-star rating at CAPS.
SanDisk (SNDK) makes data-storage cards used in laptops, smart phones, MP3 players and other consumer electronics. The Milpitas, Calif., company licenses its patented flash-memory and data-storage technologies to semiconductor companies. Over the past three years, license and royalty revenues have exceeded $1 billion. Analysts project a long-term growth rate of 14%. The stock trades at a forward-price-to-earnings ratio of 26.6 and has a three-star rating at CAPS.
Costco Wholesale (COST) is the largest wholesale club retailer in the United States. The Issaquah, Wash., company said its U.S. warehouses posted same-store sales growth of 5% in December, and 25% internationally. Analysts foresee 13% sales growth for the company. The stock trades at forward-price-to-earnings ratio of 18 and is rated four stars at CAPS.
Dow Chemical (DOW) is the nation's largest chemical company. Wall Street projects that 2010 earnings for the materials sector could double as the global economy improves. Dow Chemical does about two-thirds of its business outside the United States. Analysts project a long-term growth rate of 12% for the Midland, Mich., company. The stock trades at a forward-price-to-earnings ratio of 20.5 and has a four-star rating at CAPS.
American Express (AXP) is one of the nation's biggest credit card issuers, with more than 90 million cards in circulation worldwide. The New York company also is one of the nation's largest travel companies. The loss of household wealth during the recession has hurt AmEx, but the company said its profit jumped in the final three months of 2009, ending a streak of eight consecutive quarters of falling profits. Analysts project a 12% growth rate for the company. The stock trades at a forward-price-to-earnings ratio of 11.8 and has a three-star CAPS rating.
Intel (INTC) dominates the global market for microprocessors that go into desktop and notebook computers, with a roughly 80% share. The Santa Clara, Calif., company stands to benefit if, as some analysts expect, there's a strong PC upgrade cycle this year and powerful new chips are introduced. Analysts predict an 11% growth rate for Intel. The stock trades at a forward-price-to-earnings ratio of 11.5 and has a four-star CAPS rating.
McDermott International (MDR) is an engineering and construction company active in offshore oil and gas projects, electric power plants, uranium processing, marine transportation and other endeavors. Analysts foresee an 11% long-term-growth rate for the Houston company. The stock trades at a forward-price-to-earnings ratio of 11.8 and has a five-star rating at CAPS.
Wall Street analysts don't have supernatural forecasting skills, so these estimates may not all pan out. However, this list may be a good place to start your research.
Each stock's CAPS page can help; there you'll find the company's financial reports, key data and charts, and the comments your fellow investors have made. Turn to member blogs for insight and opinion. And the CAPS stock screener tool lets you find companies that satisfy your investment criteria.
Cool to the touch?
There should have been much to cheer about when American Express reported its fourth-quarter results. Not only did the company nearly triple its net income from the previous year, the results also topped analysts' expectations.
Yet the market knocked the stock around, leaving it bruised, battered and down more than 8% the day after the numbers were announced. Apparently, investors continue to be concerned about the still-struggling consumer.
CAPS member "DarthMaul09" sounded bearish note on AmEx last fall, writing, "Even though (the company) built its business on the high net worth/high income credit card holder, it has diversified its business (to cater) to a broader market. This diversification many have been ill timed as higher unemployment, higher taxes and depressed wage growth will likely increase the late payments and credit card defaults."
For high growth and a high rating from the CAPS community, we turn to McDermott International.
CAPS All-Star "directd" ignored the market's panic last winter and gave McDermott a thumbs-up, saying:
"At 4 times earnings this looks like an absolute steal. Global stimulus packages amounting to trillions of dollars much of which will be spent on infrastructure and energy will benefit this industry overall. . . . I expect projects and backlogs to go up as massive gov. stimulus efforts and a slow economic recovery appear far more likely than the Argmaggedon (sic) the alarmists are speaking of."
As we know now, Armageddon never arrived, and McDermott's stock has more than doubled since "directd" made that call. Is McDermott still a good bet? The CAPS community thinks so. The stock has nearly 1,300 outperform ratings versus just 31 underperforms.
It's hard to fault the optimism. Even after the stock's bull run, it's still trading at around 12 times expected 2010 earnings, a price that is a heck of a lot more attractive than the Standard & Poor's 500 Index ($INX) as a whole. And this could be a particularly interesting time to consider becoming a shareholder, as the company plans to split in two this year.
In an effort to better position its Babcock & Wilcox subsidiary, which handles highly specialized nuclear projects on government contracts, the company plans to spin off the unit and rename the rest of the company J. Ray McDermott. The business to be known as J. Ray is the very attractive global construction group that has been thriving on activity in the oil and gas sector.
Investors who own McDermott at the time of the split will end up with shares of two appealing businesses that will suddenly become much more focused on their specialized markets.
Do these stocks have what it takes to post solid growth in this economy? Or have analysts been too optimistic? Head over to CAPS and let your views be known.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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