Investors are feeling a bit whip-sawed these days. An improving
U.S.economy and troubling events abroad make it hard to know where
the market will head next.
In times like these, it may pay to de-emphasize growth stocks, as
these types of investments need a really strong
to flourish. Instead, you may want to add some exposure to
companies with long track records and largely mature business
models that are throwing off ample
free cash flow
). I've recently been looking at three companies that are
rock-solid and poised to do well in a surging or a flat economy.
1. DirecTV (
For many years, cable and satellite firms were unprofitable because
they poured every spare dime back into the business in a bid to
grow large. Those days are over and the industry is now mature. Now
these companies can just sit back and reap all thecash flow those
heavy investments were intended to produce. DirecTV is a fine
example. The company is minting money, with FCF hitting a record
$2.8 billion in 2010, up from less than $1 billion just three years
What does that kind of money buy you? Large stock buybacks. The
company bought back $5.1 billion in stock last year, andshares
outstanding have now fallen from 1.4 billion in 2005 to a recent
886 million. DirecTV has just announced plans to buy back another
$6 billion in stock, which could take the share count down to 750
million by next year. Management is also likely to issue the
company's first-everdividend next year as well.
The recent economic crisis proved one thing: people will cut off
other discretionary items before they mess with their TV access.
Sales grew 10% in a very difficult 2009 and another 12% in 2010. So
any fresh economic slowdown is unlikely to hurt thisbusiness model
recently traded hands at $45, but I see them moving up to $55 this
year as investors start to focus on more share buybacks and higher
FCF in 2012 and 2013.
In addition, despite the rise of the Internet and mobile phones as
entertainment options, DirecTV actually continues to gain
subscribers (even as cable competitors flattened out or shrank a
bit). Long-standing agreements for carriage of channels will make
it impossible for people to get access to most programs without
going through the cable and satellite guys.
Time Warner (
has developed an iPad app that allows for TV usage on a tablet, but
that highlights the fact that, for the time being, you'll need to
go through the big boys even if you want TV on mobile/Internet. I
think the day will come when DTV stops adding subscribers, but as
of now, they're still in growth mode, even more so in Latin
The biggest risk to the
is the potential delay or cancellation of the upcoming American
football season, which typically generates a big chunk of business
for DirecTV. You may want to hold off buying shares until the
current player/owner labor impasse is resolved.
2. Rent-A-Center (Nasdaq: RCII)
In tough times, cash-strapped low-income consumers tend to rent
furniture and appliances, as the purchase price for these goods is
often too high. In better economic times, a different dynamic is in
play: college grads finally leave the nest and start to buy or rent
homes of their own and they need to furnish their houses and
apartments in a hurry, often turning to rental centers. That's what
makes Rent-A-Center a "rain-or-shine" business model. The company
always sees steady demand, and FCF ranges from $100 million in bad
economic years to $300 million in good years.
To be sure, the housing sector remains weak, so the company isn't
benefitting from an
in new household formations just yet. To goose growth,
Rent-A-Center is rolling out mini-stores inside other retailers'
stores (a win-win, since some retailers are now operating stores
that are too large for the low levels of traffic they're
experiencing). There are currently 200 of these store-in-a-store
branches, and management hopes to ramp that to 800 by 2013.
In addition, Rent-A-Center is starting to expand into Mexico and
Canada, which could expand its total retail footprint by 25% in the
next four years. The Mexican opportunity is quite large, with a
potential for 400 stores, according to management. Analysts expect
sales to rise 6% this year and next, which assumes same-store sales
will remain flat. Profit growth will be about twice as fast. Those
may not be sexy metrics, but rain-or-shine business models are
characteristics have enabled the company to start paying a
while also buying back stock (3.6 million shares were purchased in
the fourth quarter). In fact, shares outstanding have fallen for
eight straight years. That's one sure-fire way to boostearnings per
) . I view this stock as a moderate gainer in a still-weak economy
-- though with minimal downside -- perhaps moving up 30% or 40% in
18 to 24 months if the economy continues to strengthen.
3. Mylan (
The steady stream of blockbuster drugs losing patent protection has
been a real boon for generic drugs makers. [See my recent take on
from this trend here.]
Mylan is the second-largest generic drug maker (behind
Teva Pharmaceuticals (Nasdaq: TEVA)
), with more than $5 billion in annual sales. More importantly, the
company has recently streamlined its business to bulk up cash flow.
FCF rose from $82 million in 2008, to $311 million in 2009 to $600
million last year. I'm not expecting that level of FCF growth in
coming years, but this is now a large, stable ship that should
generate at least that much FCF in coming years.
As part of my "rain-or-shine" thesis, demand for generic drugs is
not impacted by the vagaries of the U.S. economy. Moreover, further
cost pressures in health care will keep industry dynamics moving in
the favor of drug makers.
Mylan's business model is quite simple. Seek out drugs large and
small that represent new generic opportunities. Every month or so,
the company announces plans for the manufacture of a new off-patent
drug. Each deal adds a few pennies to
. Eventually, those pennies add up. Analysts think per share
profits will grow more than 20% this year and about 15% in 2012 to
about $2.30 per share. Shares trade for less than 10 times that
view. This stock looks to have up to 30% upside with virtually zero
downside. I like that risk/reward set-up.
Action to Take -->
Playing it safe means giving up some upside. If the market rallies
higher from current levels, these three stocks may only post
comparatively moderate gains. But if the market slumps, companies
with steady revenue streams like the three I mention here will
likely fare far better than some of the racier names out there.
-- David Sterman
P.S. -- I don't know if you're aware of this or not, but a
20-year energy agreement between the United States and Russia is
about to expire. The problem is, this deal supplies 10% of
America's electricity. When the Russians refuse to renew the
agreement, the U.S. will face an entirely new kind of energy
crisis. This disruption could send a handful of energy stocks
through the roof. Keep reading…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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