In light of these concerns, how should you (the investor) respond in the new year? Like this: Look for great, shareholder-friendly companies selling at good prices and consider alternativeinvestments with safe, substantial yields to grow your portfolio through the next several tumultuous years and decades. Sound difficult? This article will help you.
Leave your emotions behind when seeking good investments for you and your family. Emotions only cause you to panic and sell when you should be buying, or get elated and shoot for the moon when you should think about selling and taking some profits. If the newspaper or cable news reporters make you want to run to the computer, open your brokerage account and place a buy or sell order–turn it off and tune them out! Base your investments on facts, not on feelings. Feelings-based “investing” has another name: “speculation.”
The following is part two of a three-part series entitled, “13 for ’13: Thirteen Market-Beating Investments for the New Year.” In Part 1, I extolled the virtues of one popular and two lesser-known companies and suggested that you may want to start investing in them. If you missed this article, you can read it here.
Forging on with enthusiasm, here are the next five market-beating investments for the new year and (hopefully) for decades to come!
4. Caterpillar (NYSE: CAT)
My next pick is the big dog–or big larva: Caterpillar, “the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.” The fifth-worst Dow performer of 2012, CAT lost -1.1% for its stockholders. Sitting in the middle of its 52-week high of $116.95 and low of $78.25, one may wonder if the company will return to glory in the next year(s) or continue to just inch along. Its current price-to-earnings ratio of 9.7 deserves a double-take, as its 5-year P/E is a much higher 16.7. If you believe (even a little) in the concept of reversion to the mean, then the stock price would need to rise to $163 just to get back to its average P/E ratio–a 73% rise! Do I think that this will happen in 2013? Probably not. But I fully expect this to happen in the next three to five years, and I’d like to own the stock and its growing dividend while this is happening.
China is another reason to consider owning CAT. While bears and bulls abound on China’s economy both now and in the future, most concur that mid-term and long-term growth will be at least as strong (and probably much stronger) than the United States. CAT currently gets just 3% of its revenues from China, but it is investing now to help build and profit from the Middle Kingdom’s future growth. If, like me, you’re optimistic about China’s economy in the ensuing years, but are cautious of owning individual, unregulated Chinese companies, consider CAT.
5. Starbucks (NASDAQ: SBUX)
If investing in CAT seems like too much value and not enough zip, sip on some Starbucks. Many people think that this giant coffee company has already seen its finest years of growth, but I think that we are just at the beginning of its next major leg up for the next decade or two. Branching out beyond its famously strong java in the U.S. and Europe, SBUX is getting steeped in tea to tease the taste buds of our eastern hemisphere neighbors: China and India. Once these doors are fully opened (and they are already cracked), expect incredible growth. Need more proof that this worldwide movement has substantial room to grow? Read my recent in-depth SBUX article here.
6. Cisco Systems (NASDAQ: CSCO)
A former rockstar, then victim, of the internet bubble in the late 1990s and 2000s, Cisco has morphed into a cash-gushing, value investor’s dream. While its giant growth days are admittedly behind it, Cisco has wisened-up–returning to its core networking business of selling routers and switches, where it holds greater than 60% market-share. Better yet, CSCO has become extremely shareholder-friendly, which is good news for shrewd investors like us. When a company makes tons of cash year after year and decides that it wants to return a sizable chunk to its faithful shareholders, that is a fantastic situation!
Cisco has $45 billion is cash and only $16 billion in debt. Quarterly earnings grew 18% year-over-year, profit margins are 18% and operating margins are 23%. Initiating a dividend for the first time in 2010, I believe CSCO will be a powerhouse dividend-grower for many years to come. In support of this thesis, the company recently increased its dividends by a whopping 75% in October, 2012. With a recent run-up in its stock price, the current yield is only 2.8%. But with a P/E of 13 and continued increases lurking, this dividend will become monstrous in the years to come. Jump on board today.
7. Prospect Capital (NASDAQ: PSEC)
In their words, Prospect Capital Corp. is a “business development company.” That is, “a private equity firm specializing in late venture, middle market, mature, . . . buyouts, . . . growth capital, . . . and bridge transactions.” In my words, PSEC is a fantastic company that injects capital across multiple industry sectors where it can generate the highest, safest returns on investment. The sectors include energy, health care, and real estate, among numerous others. PSEC (successfully) attempts to grow its diverse portfolio for significant income, much of which is faithfully returned to its shareholders. Since June, 2010, PSEC has been payingmonthly (not quarterly) dividends with a current annual yield of 12%. This means that you receive approximately 1% of your total investment in your brokerage account each month. If I were a gambling man, I’d wager that PSEC’s monthly dividend beats your annual return from your bank’s saving or checking account!
The future remains bright for this well-managed company, its growing portfolio, and its savvy shareholders. I suggest buying PSEC any time it dips below $11.
8. Healthcare Services Group (NASDAQ: HCSG)
Could there be a less-exciting, more yawn-invoking company to own than a business specializing in providing nursing homes, rehabilitation centers and hospitals with housekeeping, laundry and dietary services? Probably not. So let me enthusiastically introduce you to Healthcare Services Group Inc.!
It’s no secret that the Baby Boomers are the largest U.S. demographic and that they are now reaching retirement age. And with age comes a significantly increased need for health care and basic “daily living” services. Putting two and two together, I see a four-letter stock ticker: HCSG.
Year-over-year quarterly revenue and earnings growth have increased by 25% and 15%, respectively. A return on assets of 13% and return on equity of 19% are nothing
to sneeze at. Gesundheit! In addition, HCSG’s balance sheet reveals $75 million in cash and no debt.
HCSG provides a forward dividend of $0.66, yielding around 2.8% at current stock prices. HCSG has paid an increasing dividend for 8 years, with an annualized dividend growth rate of 23%.
In my view, HCSG is a fantastically-boring stock that treats shareholders well and will almost certainly continue doing so. And, with the aging of our Baby Boomers (God bless ‘em), this stock has nowhere to go but up.
We now have our first eight of 13 market-beating investments for the new year. I’ve ordered them in the following summary table (below) for your convenience. Keep your eyes peeled next week for the final 5 investment ideas. Your market-beating portfolio is well on its way!
|Name||Current Price||Current Yield||Comments|
|MCD||$89.86||3.4%||Jump on board one of 2012’s Dow laggards|
|TWO||$11.72||19.1%||World’s best REIT?|
|SBY||$19.60||N/A||Vicarious ownership of rental properties|
|CAT||$94.88||2.2%||Rebounding Dow laggard & China play|
|CSCO||$20.50||2.8%||Cash-gushing & shareholder friendly|
|PSEC||$11.23||12.0%||Safe, huge monthly dividends|
|HCSG||$23.50||2.8%||Grow wealthy as Baby Boomers grow old|
Jeffrey W. Ross, MD is a Motley Fool investment freelancer.