Summary
As global markets continue to sell off, investors should be looking for stocks with strong fundamentals and relatively low risk.
Whether or not a market bottom is in sight, it is prudent to have a “shopping list” of stocks to buy in an oversold environment.
Below are 10 low-risk U.S. stocks with solid track records and favorable long-term prospects.
“Be fearful when others are greedy and greedy when others are fearful,” says Warren Buffett.
Perhaps we should all take a break from discussing technical indicators and consider the message behind these inherently contrarian words. At their very core, these words epitomize the meaning of value investing: purchasing shares of a corporation at a discount price relative to the underlying value of the company’s future earnings. Being that markets are quick to price in future expectations, such an opportunity can be rare and evasive. Nevertheless, there continues to remain one large predictor of when stocks can be purchased at a discount. That predictor is fear.
When fear invades the market, it often spreads, unjustifiably, across a variety of industries, sectors, and asset classes. The selloff of stocks in 2008 is a perfect example. While the crash in financial stocks could be viewed as somewhat warranted, food and beverage stocks were also sold off. Did consumers suddenly lose their appetite? Absolutely not. This was a classic case of prevailing fear and systemic risk. Investors who are able to pinpoint fear-induced discounts turn out to be the biggest winners. Simple as it may sound, it is not quite an exact science.
Value investing also involves identifying businesses with a wide economic moat. In order to achieve a moat, a company should first have a sound operating history, a strong balance sheet, and favorable long-term prospects. Secondly, its profits should persist with relative impunity to the economic environment. This means having a competitive advantage; providing a good or service to consumers either with unmatched quality or at a lower price than the competition. Stocks that possess these characteristics are the ones that will end up weathering the storm and outperforming the broader markets.
That said, it pays to always have a list of stocks that you would buy upon a correction. Whether or not we are approaching a bottom in the major averages is still up for debate. Some analysts are saying the markets are oversold, some say the selloff is just getting started. Nevertheless, as a value investor, I have accumulated a list of seven U.S. stocks that share 5 common characteristics. First, they are all currently profitable and have been so for the previous 5 fiscal years. Second, they have all experienced either positive annualized revenue growth or EPS growth for the past 3 years. Third, they all have positive catalysts going forward. Fourth, they pay a dividend. Fifth, they have a forward P/E under 15.
Note: All company descriptions were pulled from stock profiles on Morningstar. All financial data/metrics were pulled from finviz.com. Price charts display past 52-week percentage return versus a comparable ETF/index and were pulled from ycharts.com.
1. Gilead Sciences (NASDAQ:GILD): Gilead Sciences Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes new medicines for different medical sectors.
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The massive success of Gilead’s hep-C and HIV franchises are showing no signs of slowing down and have left the company with ample cash to invest.
Gilead’s management has proven themselves by achieving superior profit margins and return on equity while maintaining low levels of debt.
Gilead is currently priced for minimal growth relative to other large-cap biotechs, yet it is among the most rapidly growing.
Industry: Biotechnology
Dividend Yield: 1.75%
Forward P/E: 8.48
Net Profit Margin: 51.50%
Past 5Y Annualized EPS Growth: 39.10%
Past 5Y Annualized Sales Growth: 28.80%
2. Wells Fargo & Company (NYSE:WFC): Wells Fargo & Co. is a diversified financial services company. It provides retail, corporate and commercial banking services through banking stores and offices, the internet and other distribution channels to individuals, businesses and institutions.
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Wells Fargo is the dominant industry leader of financial services throughout multiple market segments because of how well it executes the cross-selling of its products and services.
The company’s management is second to none as they are able to efficiently return capital to shareholders through share repurchases and a growing dividend.
A booming housing market paired with the fact that Wells Fargo is among the leaders in U.S. mortgage lending (in terms of volume and responsible underwriting) gives rise to a bright future for the company.
Industry: Banks
Dividend Yield: 2.96%
Forward P/E: 11.24
Net Profit Margin: 44.70%
Past 5Y Annualized EPS Growth: 18.60%
Past 5Y Annualized Sales Growth: -3.30%
3. Finish Line (NASDAQ:FINL): Finish Line Inc. is a mall-based specialty retailer in the United States and operates two retail divisions under the Finish Line brand name Finish Line and Running Specialty Group.
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Athletic footwear and apparel is a lucrative and rapidly growing market in the U.S., and Finish Line is positioned to be the main beneficiary due to the company’s partnership with Macy’s (NYSE:M) and its various successful online platforms.
Management has increased the dividend each of the past 5 years at a 20.48% annualized rate.
The company sports a strong balance sheet and solid growth on both the top and bottom lines.
Industry: Retail
Dividend Yield: 1.86%
Forward P/E: 9.68
Net Profit Margin: 4.40%
Past 5Y Annualized EPS Growth: 13.10%
Past 5Y Annualized Sales Growth: 9.20%
4. Polo Ralph Lauren Corp. (NYSE:RL): Polo Ralph Lauren Corp. designs, markets, and distributes men’s, women’s and children’s apparel, accessories, fragrances, and home furnishings. Its segments include Wholesale, Retail, and Licensing.
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Former CEO Ralph Lauren has given up the reigns to Stefan Larsson, the former CEO of the Old Navy division at GAP. He was responsible for turning around Old Navy by increasing its operating efficiency and brand creativity.
Ralph Lauren’s brands are extremely popular among the millennial crowd, which should experience significant increases in disposable income as they collectively begin to join the labor force.
Ralph Lauren over the years has been able to build a sizeable brand portfolio without falling victim to the dilution of its brand image because of the company’s ability to segment its various target markets.
Industry: Luxury Apparel
Dividend Yield: 1.70%
Forward P/E: 14.5
Net Profit Margin: 8.00%
Past 5Y Annualized EPS Growth: 10.70%
Past 5Y Annualized Sales Growth: 8.90%
5. Time Warner Inc. (NYSE:TWX): Time Warner Inc. is a media and entertainment company. It operates its business in four segments which include Turner, Home Box Office, Warner Bros and Time Inc.
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Time Warner has a diversified portfolio of networks which address different target markets, including CNN, TNT, TBS, Cartoon Network, truTV, and Turner Classic Movies.
The company is among the leaders in the digital media/streaming industry with HBO and Cinemax, which are highly competitive with respect to Netflix (NASDAQ:NFLX) and Amazon Prime (NASDAQ:AMZN).
It is also one of the industry leaders in content creation (featuring shows such as True Detective and Game of Thrones), which often translates into additional marginal licensing revenue from consumer products, brands, and even video games.
Industry: Diversified Media
Dividend Yield: 1.98%
Forward P/E: 12.38
Net Profit Margin: 12.80%
Past 5Y Annualized EPS Growth: 20.20%
Past 5Y Annualized Sales Growth: 1.50%
6. Cisco Systems, Inc. (NASDAQ:CSCO): Cisco Systems Inc. is engaged in designing, manufacturing and selling of Internet Protocol (IP) based networking products and services related to the communications and information technology (IT) industry.
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The company has made strategic moves to shift its focus from hardware to software, cloud, analytics, and cybersecurity, all segments with promising growth potential.
Cisco has maintained its long-term focus on organic growth through research and development, which has increased its capabilities and the quality of its products and services.
Management has, for a long time, demonstrated its adherence to increasing shareholder value by constantly increasing its dividend, repurchasing shares when warranted, and investing in high-margin business segments.
Industry: Networking and Communication Technology
Dividend Yield: 3.26%
Forward P/E: 10.54
Net Profit Margin: 18.30%
Past 5Y Annualized EPS Growth: 5.60%
Past 5Y Annualized Sales Growth: 4.20%
7. Apple, Inc. (NASDAQ:AAPL): Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, accessories, networking solutions, and third-party digital content.
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The recent rollout of the iPhone 6S, paired with the fact that only a small portion of iPhone 5 users have yet to upgrade to the iPhone 6, should pave the way for another record-breaking holiday season for Apple.
Though Apple is highly exposed to the Chinese consumer, many industry analysts would argue that Apple’s products (especially the iPhone) should be considered consumer staples, and that the company’s sales are hardly a function of the underlying economic environment.
Apple has successfully created a strong ecosystem amongst its various products and platforms, which gives incentive to the marginal consumer to repeatedly buy and use iOS devices and products.
Industry: Consumer Electronics
Dividend Yield: 1.88%
Forward P/E: 11.30
Net Profit Margin: 22.60%
Past 5Y Annualized EPS Growth: 37.80%
Past 5Y Annualized Sales Growth: 33.60%