9/27/2011 4:15 PM ET|
The second-best stock in the world?
A lot of investors consider Apple the best stock in the world to own; the second-best isn’t so clear, but here’s a look at McDonald’s and 2 other strong contenders.
You just can't go wrong with Apple (AAPL) stock these days. Just look at these recent returns:
• 40% gain in the past year.
• 120% gain in the past two years.
• 190% gain in the past three years.
• 455% gain in the past five years.
• 4,600% gain in the past 10 years.
Given the dominant nature of the gadget giant, the $12 billion in cash on its balance sheet and its track record of innovation, it's easy to see why a great many investors agree that Apple simply is the best stock in the world.
But a share will set you back about $400. And -- the recent passing of icon Steve Jobs aside -- if you want diversification, you can't put every cent in Apple alone. Where else, then, should you stash your cash?
Even though there aren't a lot of other growth options out there -- and certainly no large-caps that have the explosive potential of Apple -- there are a handful of other blue-chip stocks that are incredibly attractive buys.
So if you already own Apple and are looking for other investments to fill out your portfolio, consider these picks. One of them may be the second-best stock in the world, or at least the second-best stock to buy right now.
McDonald's (MCD) isn't quite as dramatic as Apple when it comes to stock performance. The company has "only" doubled since 2007 and "only" tripled since 2005 -- compared with 330% gains since 2007 and 900% gains since 2005 for Apple.
But you must admit those gains still are impressive -- especially for a mammoth blue chip like McDonald's that is dominant worldwide.
Also worth consideration is the fact that, since 2007, McDonald's has paid dividends totaling $9.26 per share. Since McDonald's stock was trading around $45 four years ago, that means on top of roughly doubling your money via share appreciation, you would have gotten back about 20% of your initial investment via dividends. If you had reinvested that cash, you could have really supercharged your returns.
Looking forward, McDonald's shows no signs of slowing down. McDonald's, like Apple, knows how to deliver small-cap gains despite its blue-chip size. That makes this a great stock to own.
While hip consumer tech stocks like Apple are in favor and laggards like Cisco Systems (CSCO) and Microsoft (MSFT) are dismissed, it's worth noting that the legacy names in the technology sector aren't all dead money. (Microsoft owns and publishes MSN Money.)
Consider IBM (IBM), which has doubled since Jan. 1, 2009. That's more than three times the gain of the broader stock market.
Why is IBM stock doing so well right now? Well, earnings are a big reason. IBM earnings have been up year over year in every single quarterly report for more than half a decade.
And look at this yearly earnings-per-share growth based on the past four fiscal years and the forecast for fiscal 2011:
• 2011 estimate: $13.40, forecast up 16%.
• 2010: $11.52, growth of 15%.
• 2009: $10.01, growth of 12%.
• 2008: $8.93, growth of 24%.
• 2007: $7.18, growth of 18%.
Growth like that is simply stunning. Big Blue still is picking up steam, too, with blowout Q2 earnings in July that boasted big earnings-per-share and revenue gains along with strength in all four divisions: technology services, business services, software and systems.
It's a high-tech world, and IBM continues to be a mainstay for many businesses even as the economy remains largely sluggish. Apple's consumer focus is great, but there's a lot to be gained in the stodgy old IT industry via an investment in IBM.
Despite a very rough year so far, payment processor Visa (V) is right there beside Apple, with gains of roughly 30% since the first of the year. Visa stock continues to set 52-week highs and is within striking distance of new all-time highs.
Visa doesn't have quite the track record of many blue chips, having gone public in 2008. However, there are some big reasons to expect that the recent growth is not just a flash in the pan.
For starters, the percentage of cashless transactions continues to rise. Despite rapid growth from fees for payment processing, 40% of all transactions in the U.S. still are done with cash or paper checks. That's to say nothing of rapid growth of the credit and debit card businesses in emerging markets. Visa's logo is everywhere, and plastic will only be accepted in more places as the months go by.
And don't forget, Visa is not a financial stock. Service fees account for more than one-third of revenue -- meaning the stock is little more than a toll-taker on the road between a merchant and a customer's checking account. It is not exposed to bad debt the way financial stocks like Bank of America (BAC) are.
Visa has seen year-over-year earnings growth every single quarter since going public, and it should keep up that growth. Additionally, revenue was up 17% from fiscal 2009 to fiscal 2010 and is forecast to jump 12% in fiscal 2011.
There is big growth to be had at Visa. It might not be Apple, but its strong growth potential and dominant brand make it a go-to stock for large-cap investors.
Editor's note: This story was updated Oct. 30 to reflect recent earnings reports.
Jeff Reeves is editor of InvestorPlace. As of this writing, he did not own a position in any of the stock mentioned in this article. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
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