Romney or Obama? No matter for these stocks
The numbers from a company's balance sheet and fundamentals should drive your investing -- not the results of next Tuesday's vote.
As Election Day creeps closer, all sorts of pundits and prognosticators are telling us who is going to win the presidency -- and what it will mean for the economy and the stock market. Depending on whether President Obama is re-elected or Mitt Romney upends him, investors could be faced with some very divergent scenarios, many say.
Not Barry Ritholtz. Ritholtz, who has been one of the more insightful strategists around over the past several years, recently told Bloomberg News that the impact of elections on the economy and market is "overstated by most observers." He added, "The forces that drive the economy, that drive society, are much bigger than any one election, and they tend to go on for years and decades."
While presidents' policies no doubt can have some impact on the economy and the stock market, I tend to agree with Ritholtz. So many factors go into the economy and the markets that extend far beyond the reach of the Commander-in-Chief.
For example, the stock market thrived during President Clinton's tenure before tanking during President Bush's first year-and-a-half. But had Clinton been able to serve a third term, would the tech bubble's bursting not have continued to drag markets downward in 2001 and 2002? I find it hard to believe it wouldn't have. Similarly, had John McCain won the 2008 election, would the European debt crisis not have roiled markets in 2011? Doubtful.
From an investment perspective, I'm more concerned with the numbers on a company's balance sheet and in its fundamentals than I am with who has the keys to the White House. Good companies have thrived in a myriad of climates throughout history, and I think well-financed, efficient firms with cheap shares will continue to do well over the long haul -- regardless of whether Obama or Romney walks away victorious next month.
With that in mind, here are a handful of stocks that my Guru Strategies -- which are based on the approaches of such investing greats as Warren Buffett, Peter Lynch and Benjamin Graham -- are high on as election season comes to a head.
Discover Financial Services
Discover Financial Services (DFS) offers direct banking and payment services. Its payment services options include its Discover cards, as well as Diners Club International and PULSE cards. The $20 billion market cap firm gets strong interest from the model I base on the writings of mutual fund great John Neff. Neff looked for stocks with low price-to-earnings ratios -- but not too low, since a very low price-to-earnings ratio can be a sign of a dog. The model I base on his writings looks for stocks with price-to-earnings ratios that are 40% to 60% of the market average, and Discover's price-to-earnings ratio of 9.3 fits the bill.
Neff wasn't interested in huge growth numbers, which are often unsustainable -- and often come with a high price tag. He instead looked for companies with solid, sustainable earnings growth that was fueled by growth in sales. Discover's long-term earnings per share growth rate is 17.8% and its long-term sales growth rate is 27.1%, so it fits the bill (I use an average of the three-, four-, and five-year earnings/sales growth rates to determine a long-term rate).
Tech Data Corporation
Tech Data Corporation (TECD) has more than $25 billion in sales over the past year and is one of the largest wholesale I/T distributors in the world. It has a market cap of about $1.7 billion. Tech Data gets strong interest from my Peter Lynch-based strategy, which considers it a "fast-grower" -- Lynch's favorite type of investment -- thanks to its impressive 26.3% long-term earnings per share growth rate (based on an average of the three- and four-year earnings per share growth rates). Lynch famously used the price-to-earnings-to-growth ratio to find bargain-priced growth stocks, and when we divide Tech Data's 9.5 price-to-earnings ratio by that long-term growth rate, we get a P/E/G of 0.36. That falls into this model's best-case category (below 0.5).
Lynch also liked conservatively financed firms, and the model I base on his writings targets companies with debt-to-equity ratios less than 80%. Tech Data's debt-to-equity ratio is about 5%, another good sign.
Raven Industries (RAVN), which has a $1 billion market cap, started out more than 50 years ago as a manufacturer of high-altitude research balloons for the U.S. space program. Today, its Aerostar division still makes research balloons and other products like parachutes and protective wear. But Raven also has extensive operations that blend the fields of technology and agriculture, with products that include field computers, planter and boom controls, GPS guidance, and protective films and sheeting used to protect environmental resources.
Raven is a favorite of my Warren Buffett-based model. This model looks for companies with lengthy histories of earnings growth, manageable debt, and high returns on equity (which is a sign of the "durable competitive advantage" Buffett is known to seek). Raven's earnings per share have dipped in only one year of the past decade; it has no long-term debt; and its 10-year average return-on-equity is an impressive 24.8%.
AmerisourceBergen (ABC) is a pharmaceutical services company that handles about 20% of the pharmaceuticals sold and distributed throughout the U.S. It also has operations in Canada. The $10 billion market cap company gets approval from the model I base on the writings of hedge fund guru Joel Greenblatt. Greenblatt's approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital. My Greenblatt-inspired model likes Bergen's 12% earnings yield and 100% return on capital, which combine to make the stock the 32nd-best in the entire U.S. market right now, according to this approach.
My Lynch-based model also likes Bergen, which has been growing earnings at a 19.7% clip over the long haul and trades for a reasonable 14.7 times earnings. That makes for a 0.75 price-to-earnings-to-growth ratio, which comes in under this model's 1.0 upper limit. The company also has a reasonable debt-to-equity ratio of 64%, another reason the Lynch approach likes it.
Bed Bath & Beyond
Bed Bath & Beyond (BBBY) is a home goods and furnishings retailer ($13.2 billion market cap) with stores in the U.S., Canada, and Mexico. It has taken in about $10 billion in sales in the past 12 months. It's a favorite of my Warren Buffett-inspired strategy, in part because it has upped earnings per share in all but one year of the past decade. A couple more reasons this approach likes BBBY: It has no long-term debt, and has averaged an return-on-equity of more than 20% over the past 10 years.
Bed Bath & Beyond also gets strong interest from my Lynch-based model. It likes the company's 22.4% long-term earnings per share growth rate and 13.4 price-to-earnings ratio, which make for a stellar 0.60 price-to-earnings-to-growth ratio. And like the Buffett-based model, it likes BBBY's lack of any long-term debt.
John Reese is long DFS.
John Reese is founder and CEO of Validea Capital Management and Validea.com, a premium investment research site, and the author of "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".
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