Investing in the stock market can be overwhelming or downright
scary. The choices are endless, and a step in the wrong direction
can result in steep losses, even for experienced investors.
Nevertheless, you shouldn't put off investing until you think the
"time is right." Now is the best time to start. Procrastinating
will not help you reach your goals. If you set reasonable goals,
you can reach them, and we can help! At Cabot, one of our best
features is that our editors conduct all of their own research,
write all of their Cabot letters, and answer all emails from our
subscribers. It's a lot of work, but it's worth it because our
subscribers love us and stay with us!
Here are some tips for successful investing.
Minimum Investment: There are no rules when it comes to
minimum amounts to invest in stocks, bonds, exchange-traded funds
(ETFs) or mutual funds. Investing in stocks and bonds allows you to
tailor-make your portfolio to meet your objectives. ETFs and
mutual funds provide diversification without investing in a lot of
Core Holdings: If you are starting to invest now, I strongly
recommend investing in a group of "core" or primary holdings to
start. Your core holdings should include leading companies in
several different industries. Your companies should boast strong
balance sheets with low debt and lots of cash. They should
also have a long history of steadily growing sales, earnings, and
dividends. In short, your primary holdings should be made up of
companies that have been around for a long time and will continue
to be around despite various crises lurking around the next corner.
Once you have established the core of your portfolio, you can then
add other companies to help diversify your portfolio further and to
tailor your portfolio to meet your objectives.
Objectives: I recently attended my daughter's graduation from
Dartmouth College. She is now ready to embark on what will
hopefully be a very successful career. My advice to her about
investing is a lot different than my advice to many of my
subscribers who are retired. My daughter can invest aggressively,
because she has several decades to create wealth. Retirees need to
preserve their nest-egg, so they need to invest more
Diversification: I am a strong proponent of diversification.
If you invest in only a few stocks, then one bad stock can ruin
your day and jeopardize your gains. I recommend investing in a
minimum of 12 stocks. Twenty stocks are even better, if you have
the time to adequately keep up to date on each and every stock.
Allocation: Not only should you invest in several industry
sectors, your holdings should also be diversified in several other
categories, such as: size, risk, U.S. or foreign and type including
defensive, value, growth, cyclical and speculative. I
maintain allocation objectives to make sure I do not become
over-weighted in any one category.
There are literally thousands of companies from which to choose,
but only a handful possess near-perfect growth records. Many years
ago, I developed a system to measure the growth consistency of a
company's earnings and dividends. Companies that have increased
their earnings and dividends at least 10% in each of the past 10
years receive a perfect score.
Within my database of 1,000 stocks, only one company has a perfect
score: FactSet Research (
). There are a number of other companies with near-perfect earning
and dividend scores. Companies with near-perfect records of steady
growth coupled with strong balance sheets and clear outlooks for
future growth are generally worthwhile candidates for long-term
Two of the most attractive very high-quality companies in my
database are McDonald's and TJX Companies. Both are well qualified
to be included as long-term core holdings in your portfolio.
) operates 32,500 fast-food restaurants in 118 countries and
generates $23 billion in sales. International sales have provided
much of the company's revenue and earnings growth during the past
20 years and now contribute 65% of total sales. Worldwide
same-store sales increased 4.8% in April and May compared to an
increase of 4.2% during the quarter ended 3/31/10. While
international sales are leading the growth, sales in the U.S. are
stronger than other U.S. restaurants because Americans are eating
at less expensive restaurants, such as McDonald's, to save money
during the weak economy.
McCafe beverages, which include latte, frappe, and cappuccino
offerings, have become a big hit. Free Wi-Fi access to the Internet
and the new Breakfast Dollar Menu are also helping to attract
diners. Sales increased 5% and EPS (earnings per share) rose 16%
during the last 12 months. We expect sales and EPS growth of 6% and
10% respectively during the next 12-month period and beyond.
MCD shares are reasonably priced at 14.9 times forward 12-month EPS
with an attractive dividend yield of 3.2%. MCD has raised its
dividend by an eye-popping 25% per year during the past 10
years. The balance sheet is strong with modest debt and $2
billion in cash. McDonald's financial history includes steady
sales, earnings and dividend growth during the past 35 years. I
recommend MCD as a buy now.
Another of my top choices for a core holding is TJX Companies (
). TJX is the largest U.S. retailer of discount apparel and home
fashion goods with 2,700 stores in the U.S., Canada, Germany,
Ireland and the United Kingdom. The company's main chains are T.J.
Maxx, Marshalls, Winners and HomeGoods.
Management believes the slow economic environment offers
outstanding opportunities for growth. TJX opened more stores than
originally planned in 2009 and renovated many of its existing
stores. These moves attracted many new customers who were drawn to
low prices and good-quality merchandise. We expect TJX to retain
its newfound customers and expand its store base aggressively
during the next couple of years.
Same store sales increased 4% in April and May 2010. TJX shares are
undervalued at 12.9 times forward 12-month EPS. Sales and EPS will
likely increase by a minimum of 8% and 10% respectively during the
next 12 months and accelerate thereafter as new stores become more
TJX increased its dividend at the end of 2009 and has raised its
dividend by 22% per year during the past 10 years. The dividend
provides a 1.3% annual yield. The company has a strong balance
sheet with a reasonable amount of debt and lots of cash. Sales,
earnings and dividends have been growing steadily for the past 14
years. I recommend TJX as a buy now.
J. Royden Ward
For Cabot Wealth Advisory