Got The Market Jitters? Try Some Earnings All-Stars
Some weaker-than-expected economic data, lingering trouble in the Crimea, the stock market's momentum-stock selloff-- all of that has many investors worried that a recession and bear market may be lurking around the corner. In the three weeks ending May 14, for example, investors yanked a net of more than $8 billion from US domestic equity funds, according to the Investment Company Institute.
The problem is, we humans aren't very good at predicting recessions or bear markets. According to Dalbar Inc.'s recently released 2014 Quantitative Analysis Of Investor Behavior, the average fund investor has lagged the S&P 500 by more than 7.4 percentage points annually over the past 30 years. The big reason: bad market timing decisions. Investors buy high and sell low all too often because emotion leads them astray. That's why I believe a buy and hold approach is the best way for most investors to go.
If you are finding the latest round of stock market and economic fears too much to take, however, there are options that can ease your nerves a bit while still keeping you in the market. For example, you may want to focus on some more conservative , steady plays. One of the criteria that my Warren Buffett-inspired Guru Strategy uses to identify such firms is earnings persistence -- it wants companies that have increased earnings every year for the past decade, allowing a couple dips if they are minor. These are the types of firms that have proven they can make money in good times and bad -- and they are hard to come by. Only 1.2% of the nearly 7,000 stocks in my database pass the Buffett-inspired earnings persistence test. They might not be the sexiest companies, but their stability and all-weather earnings ability should make you sleep better at night.
Here's a sampling of firms that have no more than one EPS dip over the last decade, and which get strong interest from at least one of my Guru Strategies.
FactSet Research Systems Inc. ( FDS ): This Connecticut-based global financial data and analytical applications provider ($5 billion market cap) has increased earnings in every year of the past decade, one reason it gets high marks from my Buffett model. Two more: It has no long-term debt, and has averaged a 10-year return on equity of 28.8% -- a sign of the "durable competitive advantage" Buffett likes his investments to have.
Buffalo Wild Wings ( BWLD ): This Minnesota-based restaurant/bar chain has over 1,000 locations across all 50 states in the United States, as well as in Canada and Mexico. It has upped EPS every year of the past decade, and gets strong interest from my Martin Zweig-based strategy, thanks in part to its strong, accelerating growth. EPS grew 71% last quarter, up from average of 41% in the previous three quarters, up from 22% long term (I use an average of the 3-, 4- and 5-year EPS growth rates to determine a long term rate). The Zweig model also likes that sales growth -- not one-time factors -- has driven earnings growth over the long term (25% long term sales growth rate, using an average of the 3-, 4- and 5-year sales growth rates). And it likes that the firm's debt/equity ratio of just 7% is far below the restaurant industry average of 158%.
W.W. Grainger, Inc. ( GWW ): Grainger ($17 billion market cap) is a broad line supplier of maintenance, repair and operating products, with operations in Asia, Europe and Latin America. It has just one EPS dip in the past decade -- a minor 6% decline in 2009 -- part of why my Buffett approach likes it. Grainger could pay off its long term debt of $438.1 million in less than a year if need be, given its annual earnings of $798.0 million, which the model considers exceptional. Throw in a 10-year return on equity close to 20%, and you've got a very Buffett-esque firm.
Middleby Corporation ( MIDD ): One of the best performing stocks of the 2000s decade, this maker of commercial cooking equipment is now a more steady grower. Its annual EPS have declined only once in the past decade -- a fairly tame 12% decline in 2009 -- which helps earn it strong interest from my Buffett-based model. It also likes that Middleby's debt ($650 million) is less than five times annual earnings ($163 million). And it likes Middleby's stellar 10-year return in equity of 23.6%.
Oracle Corporation ( ORCL ): You might not think of the tech sector when it comes to steady, consistent growth, but times have changed. This California-based software giant has upped EPS in every year of the last decade -- even through the Great Recession. It's a favorite of my Peter Lynch-based model. Lynch famously used the P/E-to-growth ratio to find attractive stocks, adding dividend yield to the "growth" portion of the equation for big, dividend paying firms like Oracle. When we divide Oracle's 17.4 P/E by the sum of its growth rate (20%) and yield (1.2%), we get a yield-adjusted PEG of 0.83. Anything under 1.0 is considered a bargain. My Buffett-based model also likes Oracle, in part because of its decade of annual EPS increases. The firm also has enough annual earnings (nearly $11-billion) that it could pay all of its debt (about $22-billion) in about two years, and has averaged an ROE of 23.7% over the past decade.
Disclosure: I'm long ORCL, BWLD, and MIDD.