The folks at Street Authority are big fans of the “list of great stocks” teasers — they pitch the idea of a list of blue chippers that are either the top ten picks for this year, or the top ten “forever” buy and hold stocks, give one or two of them away to whet your appetite, then try to get you to subscribe to learn about the others.
And it works, they usually get me interested — not enough to subscribe, of course, that’s not how we do things here at Castle Gumshoe… but to tinker with their tantalizing hints and figure out what stocks they’re talking about. Now they’re touting the “top 10 stocks for 2015,” and the broad rationale is similar to past ads they’ve sent — they’re looking for stocks with some combination of great cash flow, shareholder returns, and “irreplaceable assets.”
Can’t argue with those criteria… so what are the stocks? We’ve got ten to look for today, so we’ll try to be quick with each one. Here’s the first snippet of clues:
“The “No-Brainer” Investment For 2015
“Top Stock #1 owns the 12th most powerful brand in the world, valued at $25 billion, according to Forbes. That’s ahead of companies like Disney, Facebook and Wal-Mart. One of the most shareholder-friendly companies on the planet, this firm paid a whopping $13.3 billion to its shareholders in 2014 . And with an enormous $52 billion cash stockpile – more than two times Apple’s $25 billion – those payouts don’t seem to be slowing.
“Now there’s a mega-growth catalyst propelling the company forward. Business Insider says this catalyst will create “The World’s Most Massive Device Market.” This trend is in its infant stages right now, and our research suggests that it could send shares of Top Stock #1 soaring in the next twelve months.”
That’s one of the “freebies” they give away later in the ad, Cisco Systems (CSCO), which reports earnings tomorrow — so there’s a lot of press out about the company now as everyone tries to predict what they’ll say, and what the outlook from CEO John Chambers will be. They do have a fantastic balance sheet, though they also carry $20 billion in debt (like many US companies with international operations, including Apple, they’ve been borrowing money cheap so they can buy back stock and raise dividends without “repatriating” their overseas cash and having to pay US taxes on that money)… so that net cash figure is “only” about $32 million.
If you back out that $32 million in net cash and use their “enterprise value” instead of the market cap, Cisco is trading at a trailing PE of a little less than 15, and they pay a strong and growing dividend that’s currently providing a yield of a bit under 3%. Cisco is the big daddy in the “Internet of Things” business, since they are the large cap that talks about it most often and issues white papers about the IOT all the time — and they should presumably be one of the winners of a “more connected things” world since, well, they are the leaders in the “connections” business with their switches, routers, and huge cash pile that they can throw at R&D (or acquisitions) to try to “own” new outshoots of those businesses.
Can’t argue much with Cisco, but the argument against them has been that the router/switch business is getting commoditized and that they’re losing business to the cheaper Chinese companies like Huawei… that’s been the complaint for several years, and it’s probably why Cisco is still relatively inexpensive (like many other “old tech” companies), but it hasn’t hurt them all that dramatically — over five years, their gross margins have gone from about 64% to 59%, and they’ve made up for about half of that drop with cuts to operating expenses, so they still have a net profit margin after taxes of about 17%. They’re not growing revenues very fast, and earnings are not consistently growing each quarter, but they are still the dominant company in their sector and they’re not at risk of being unprofitable anytime soon.
The second Freebie is Starwood Hotels & Resorts (HOT), which they pitch as being a George Soros favorite:
“George Soros is Loading Up on This New Apple Partner
“Our next Top 10 Stock has been on a tear lately – its share price has more than doubled in just the past five years.
“And we don’t expect it to slow down any time soon. This high-end hotel management company owns and operates some of the world’s most recognizable brands, including Westin, Sheraton, W and St. Regis.
“Its combined collection of hotels and resorts includes more than 1,200 properties spanning nearly 100 countries across the globe.
“From the U.S. to Fiji… Hong Kong to Djibouti – presidents, prime ministers and crown-princes alike have all relaxed and relished in the company’s unique luxury suites.
“This worldwide appeal has allowed the company to sell its high-end products at premium prices. And that’s resulted in a share-price that has crushed the S&P 500 during the last several years.
“As we showed you earlier in the report — thanks to the firm’s enormous shareholder yields — shares have soared 144%, against the market’s 86% return.
“Shares of Starwood Hotels & Resorts (NSYE: HOT) have beat the market by 53 percentage points since 2010 – clocking in at a 138% gain compared to the S&P’s 85% gain.
“We think this stock will be one of our best-performing Top 10 Stocks of 2015. And we’re not alone in thinking so…”
I don’t know much about HOT, but they are following in the path of Marriott in moving to an “asset light” business, where they manage properties and franchise hotel brands but don’t own many of the actual buildings. That creates cleaner balance sheets, and generally steadier cash flow and profit margins. They just reported earnings today, and analysts cheered because they both beat on earnings (though revenue was apparently “light”) and announced that they’re spinning off their vacations/time share business. All the big hotel companies are more or less doing the same thing, from what I can tell, and they’re all looking pretty expensive at this point (forward PEs are pretty much all in the mid-20s), so though they are cyclical businesses that perform well when leisure and business travel are booming, as they are now, I don’t have a real sense of whether they’re too pricey. HOT’s shares are perhaps not as beloved as those of Hilton (HLT) and Marriott (MAR), so perhaps that’s one reason to take a closer look.
And how about the “secret” stocks that they don’t reveal in the ad? Let’s see what hints they roll out for us…
“One Of The Widest Moats On The Planet
“Top Stock #3 is a $40 billion firm that counts 80% of Fortune 500 companies and 90% of Fortune 100 companies as clients, because it sells a product that is absolutely essential to the its clients’ everyday operations. The firm generates five times more revenue than its closest competitor , and it just celebrated 40 straight years of dividend increases. That’s one of the safest dividends on the planet. And despite its performance over the last decade – the stock has tripled and beaten the S&P by 191% – it looks poised to dominate the market again in 2015.”
This one is ADP (ADP), the payroll processor and HR outsourcing giant. There seem to be new companies cropping up every day that are trying to take ADP’s business, but they’ve been awfully hard to topple and they have an exceptional dividend growth record. Big, reliable dividend growers aren’t always in vogue, and the stock has occasionally been priced cheaper than the overall market (in terms of PE ratio), but this has been a premium priced stock in recent years as investors lust for dividends and stability. I don’t know of anything bad to say about ADP other than the fact that they’re pretty expensive — they’re big and definitively a blue chip, and have come back strong every time investors feared they were losing out to cheaper upstarts. In the past, ADP has been a play both on employment growth (more employees equals more fees for payroll providers) and on interest rates (they can sometimes hold payroll cash for a day or two as it processes through the system, so when interest rates are above zero they can earn a little vigorish on that money… not so much these days).
“One Of The World’s Most Valuable Brands
“Top Stock #4 is a leading global retailer with one of ‘The World’s Most Valuable Brands,’ according to Forbes. Millions of consumers around the world use its addictive products every single day. The company burst onto the scene in the early 1990’s and has been on a tear ever since – producing a more than 12,000% return for early investors. Just since 2008 the stock has gained over 1,000%. That’s no surprise, because 2014 marks the company’s fifth straight year of increasing its revenues.
“Revenue growth tends to translate to share price growth. And that growth isn’t likely to slow down anytime soon.
“Because of intense customer loyalty, aggressive international growth, and recent expansion into the same market channels that helped make Coke one of the world’s best performing stocks over the last few decades – this company is in position to continue producing record-beating sales for years to come.”
Well, you have to plumb the lows of the market in early December of 2008 to get that 1,000% return — and if you were buying then, you don’t need Street Authority to tell you what to do… most of us, regardless of how much we look back now and say “buy low, of course!” were busy that Winter with other things. Like wetting our pants and worrying that the world was about to come to an end. I still kick myself for taking a close look at this stock in 2009 and not buying in the low teens… this is our old friend Starbucks (SBUX), which is also on a tear early this year thanks to a strong earnings report in late January.
Starbucks is a classic growth stock — very strong brand, well-managed and opportunistic at growing in new segments and expanding their offerings (like their more recent focus on better baked goods and better teas, in addition to continued international expansion) to increase sales, and growing earnings at about 20% a year — so it is, naturally, priced at a lofty PE ratio between 25-30 because investors believe in that growth. That gives them a PEG ratio of about 1.5, which seems very reasonable. Expectations are pretty high, but they are generally met — though that doesn’t mean the stock can’t go down, even without a market swoon, SBUX seems to hit periods when the stock drops by 20-30% every year or two on small disappointments or analyst pessimism about expansion or margins or coffee bean pricing. I’ve never owned the stock, but with all the coffee I drink I probably should.
“51,000 Miles of Pipelines
“Top Stock #5 is a world-leading business. Its position in the U.S. petroleum pipeline is unparalleled. The company owns critical infrastructure and transport corridors – those ‘irreplaceable assets’ I mentioned earlier – that its competitors simply cannot duplicate. As is often the case, that unique asset portfolio has translated into superior performance for this industry leader. The company’s net income has risen by over 150% over the past four years. No surprise that its share price has followed suit. It’s sitting on a 183% gain in just two years – outpacing the S&P’s 42% gain.”
It’s hard to match that exactly without knowing what date they use for their “just two years” or “past four years”, but our likely candidate here is Kinder Morgan (KMI), which has had gains in that neighborhood over the last couple years (assuming you use “total return” and include dividends), and does own roughly 51,000 miles of pipeline. Enterprise Products Partners (EPD) is the other likely candidate, they’re also massive and operate about 51,000 miles of pipeline, but the shares have not done quite so dramatically well during that timeframe. Both companies are massive, both pay out nice dividends/distributions in the 4.25% neighborhood, but KMI is no longer a MLP so may no longer give you the same tax advantages (or tax reporting headaches) as the MLPs like EPD.
Both will be sensitive both to oil and gas production/transport volumes (not so much prices) and to interest rates, since they’re typically owned as income securities. Assuming that KMI is the stock, as seems likely, they announced that they expect a dividend of $2 in 2015 (which would mean a 4.8% yield at today’s price) and 10% dividend growth over the next five years — if they can hit those numbers, I’d happily own the stock (I don’t happen to own any pipeline or utility stocks right now). I haven’t seen much from Kinder Morgan about whether the drop in oil and gas prices is expected to hit their numbers or impact those dividend projections — but certainly they’ve got as big a pile of “irreplaceable assets” under their control as anyone, so if we’re going to be shipping oil and gas around the country they’re going to get a good cut of the transport costs.
Next? Here we get more directly into the oil business…
“Top Stock #6 gives you a stake in the second-largest land owner in the oil-rich Permian Basin. The firm controls nearly 1.9 million net acres and 1.2 billion barrels of resource potential. The company has raised its dividend every year since 1998 at a cumulative annual growth rate of nearly 16%. 2014 marks the sixth straight year the company has increased its revenues as well – up almost 70% since 2009. But I think the company has plenty of growth ahead of it due to its proven ability to increase production rates at a time when other energy firms aren’t able to do so. And as history has shown, that growth will likely be passed on right to shareholders. And the best part is this stock’s share price has experienced a pullback recently, making now a good time to buy it at a great price.”
Well finding an oil stock that hasn’t experienced a “pullback” recently would probably be a mighty challenge — but this one is Occidental Petroleum (OXY), which has “refocused” on the Permian Basin in recent years (along with lots of other producers) and, like many of the other mega-size oil majors, has been quite resilient in the face of oil’s 50% drop in price since last Summer (down only 15-20% or so from the peak — about the same as Chevron, a little worse than ExxonMobil, a little better than ConocoPhillips).
I don’t know much about OXY’s business, but analysts are certainly penciling in an end to those years of growth this year — though they are expecting growth in both revenue and earnings to start to pick up again in 2016, though I suspect that is as much about guessing what the future price of oil will be as it is about anything fundamentally happening just at OXY. Occidental earned almost $5 a share in 2014, analysts are expecting about $1.50 this year and $3.50 next year … and there’s clearly a lot of trust in the ability of these big oil companies to navigate uncertain prices, since the earnings projections for 2015 are down 75% (and the earnings projection for 2016 down 50%) from where they were a few months ago, but the stock is down only about 20%.
Like all the other big exploration and production companies, they’re slashing their capital budget to be conservative with oil prices low, but they’re still spending and producing — more in the Permian and parts of the Middle East, less in higher-cost areas like the Bakken, and analyst numbers are going to be all over the map for OXY as we navigate the next few quarters (at least) of wildly divergent expectations about future oil prices. They shouldn’t have any trouble covering their dividend with their cash flow, which brings a yield of about 3.5%, unless the downturn really sticks for more than a year — but they could also cut it to be conservative, since the annual payout is now about twice what analysts expect 2015 earnings to be.
Only a few more to go… still with me?
“A 400% Dividend Increase In Just 7 Years
“Top Stock #7 is another company you’ve likely never heard of before. But with seven consecutive years of boosting its dividend – a near 400% increase – it’s time to put this company on your radar. This little-known energy pick recently increased its earnings estimates for 2014 by 21.9% .
“A 20%-plus earnings increase is huge, but the firm is likely to even beat that estimate by a wide margin. Just look at how much the firm has beaten its estimates by, over the past four quarters… up to 62.5%.”
This one must be, given the table they provided of the earnings “beats” for the past four quarters, Targa Resources Partners (NGLS). NGLS, a midstream MLP, has indeed been public and been paying a unitholder distribution since 2007, and the distribution has risen by almost 400% since that first payout. They are in the process of merging with Atlas Pipeline, and I haven’t looked at the details for the combined company (which is complex, given that each company has a publicly traded general partner “parent” that’s merging as well as the MLP “child” — they describe it in rough terms here. The 11-13% distribution growth they announced as their target for NGLS in 2015 would be a slight acceleration from their recent distribution growth, so that’s good, and the MLP does yield a very solid 7% — I have no idea what impact current oil and gas prices will have on their revenues over time, though, like most midstream and transport MLPs, they’re not nearly as directly impacted by commodity prices as the actual producers and explorers (and even the refiners) are.
“An 80% Stranglehold On A $30 Billion Market
“Every $1,000 you invested in Top Stock #8 back in 1972 would be worth a stunning $2,075,000 today. Maybe that’s why it’s one of Congress’ favorite ‘sweetheart’ stocks. In total, more than 50 members of Congress own a stake, and several big financial firms own a piece of this company, too. State Farm owns 39 million shares. Bank of New York Mellon owns 24 million. And Bank of America owns 33 million shares of this stock.
“Meanwhile, the company is raising its dividend, spending billions to buy back its own shares, making smart acquisitions, and according to investment research firm Morningstar, owns an ‘80% stranglehold on a $30 billion market….’ It’s no wonder shares soared 43% in the last twelve months… with no signs of slowing down in 2015.”
They’ve been pitching this same stock using pretty much exactly that same language since at least 2011, and it’s worked out awfully well so far — this is Intel (INTC), a stock in which I still own a tiny stake (I sold most of it by selling covered calls at $30 in late 2013 that were later exercised). Intel is obviously still a dominant company, most people would consider it the most advanced semiconductor manufacturer and it’s certainly got an enviable position still in desktop and server chips. The stock was cheap for a while, trading down at 8 or 9X earnings, partly because folks thought the mobile revolution would leave them behind — but, as with Cisco, sometimes the big “dinosaurs” of tech get counted out too early, and Intel is continuing to invest in building their business in mobile and other “growth” areas.
It’s not super-cheap anymore, but it’s still certainly reasonable at about 12X forward earnings, and with a dividend yield of about 3%. I’d like to see the stock back down another 10%, or see sentiment drift a bit lower, before buying more — but that could just be because I’m being stubborn about the shares I sold about a year ago.
More? You got it…
“The ‘Hated’ Stock That’s Making Investors Rich
“Top Stock #9 could be the most ‘hated’ stock in the world due to the addictive nature of its products. That said, the firm is hands-down one of the most shareholder-friendly firms I’ve ever seen. It pays a whopping 77% of its revenues to shareholders in the form of dividends – totaling more than $11.7 billion last year alone. And the firm has raised its dividend by more than 70% over the past five years.
“But there’s still plenty more to love about the company. Like its 26% profit margins – more than double its industry average – and its near 30% global market share. Both have helped boost the company’s share price nearly 108% in five years.”
This one is Philip Morris International (PM), the global half of the old Philip Morris (the US part is now Altria, ticker MO). They do have fantastic profit margins, they’ve grown the dividend tremendously, and even as revenue and earnings shrink, and book value goes negative, they still seem to have plenty of cash flow to keep investors happy. I never look very closely at this one because tobacco is one of the only sectors where I won’t personally invest, but cigarette firms created a lot of fortunes in the 20th century… how long that continues, I don’t know.
And finally we close it out with the one they seem most excited by…
“The Single Best Investment For 2015?
“Top Stock #10 is one of the world’s leading financial service providers, serving over 21 million customers in more than 55 countries. Though you may not know much about this company, it has outperformed bigger names like Bank of America and Wells Fargo over the past 10 years – returning 168% compared to Wells Fargo’s 132% return and Bank of America’s -54% return.
“Despite the massive hit most financial institutions took during the ’08 recession, this firm pays perhaps the most reliable dividend in the banking business. In fact, it was one of the few banks that maintained its dividend throughout the financial crisis – and soon after the crisis, it returned to increasing its dividend. Since January 2009, the firm has increased its dividend nearly 35%. Add in the firm’s stellar 32% profit margin, and you could be looking at the single best investment for 2015.”
This one is Bank of Nova Scotia (BNS), more commonly referred to as Scotiabank. It is indeed a large international bank, based in Canada, and it does have a total return that beats Wells Fargo over the last decade (if you use numbers from a couple months ago). More recently, it’s been taking a bit of a beating along with the Canadian dollar as oil prices fall — I don’t know if there are other things bringing the hurt for BNS of late as well or not, but the stock is down about 20% over the last six months while most of those big US banks that come to mind are up about 8-10%.
BNS pays a strong dividend, it was indeed quite steady during the financial crisis (though the shares fell for a while, of course), but the same can be said of all the large Canadian banks — they just didn’t have the same US mortgage exposure as most US banks, nor, if you ask most folks, the same risk-taking attitude. They are tied to their home currency, though, and Canada’s economy is more reliant on energy production than the US, so perhaps that’s enough to explain the recent weakness.
So there you have it — ten stocks that Street Authority is holding out as the “Best of 2015″… pretty heavy on technology and energy, but quite mainstream for the most part, with many stocks that most investors would consider to be of the “blue chip” variety. Any of them appeal to you, or turn you off entirely? Throw your comments on the pile below.
Or, better yet, do you have a top ten for 2015 that you want to write on the walls here at Gumshoe HQ to claim your future bragging rights? Let us know your “best of 2015” with a comment in the friendly little comment box that you’ll see if you scroll down just a wee bit more. Thanks for reading!
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