Safe Guru Picks for Worried Investors
If you're like most investors, you probably are, thanks to all of the turmoil in the Middle East. Tunisia and Egypt were one thing, but now with Libya -- and its 1.5 million daily barrels of oil exports -- in chaos, investors are feeling the heat.
I for one am not overly concerned. Yes, the situation in the Middle East bears watching. But keep in mind that the U.S. imports only about 80,000 barrels of oil a day from Libya, according to the U.S. Energy Information Administration; by comparison, we get almost 2 million barrels a day from Canada.
More importantly, I believe in sticking to a disciplined investing system. History has shown time and time again that ditching stocks when times get tough will often leave you selling low and buying high. Sticking to a long-term strategy is key to generating solid long-term returns.
If your emotions are getting the better of you and making you want to ditch stocks altogether, however, you might first consider some safer, more defensive areas of the market. Some of my Guru Strategies -- each of which is based on the approach of a different investing great -- are designed to find just those type of steady, defense-oriented stocks.
My Benjamin Graham-inspired strategy, for example, looks for firms with strong balance sheets and shares that are already selling at low enough levels that it's unlikely they'll fall much further if bad news hits. In 2008 -- when the S&P 500 was falling more than 38% -- my Graham-based portfolio did its job, limiting losses to 14.1%.
Other defensive-minded strategies include my Peter Lynch-inspired "stalwart" strategy, which looks for big, steady, low-debt blue chips, and my Warren Buffett-based model, which requires that a company have a 10-year track record of increasing earnings and posting high returns on equity and total capital.
Given the fear in the market right now, I recently screened for stocks that pass one or more of these defense-oriented strategies. Here are some stocks that made the grade.
Ensco Plc ( ESV ): This London-based firm provides offshore drilling services to the petroleum industry. Its fleet includes eight ultra-deepwater semi-submersible rigs, as well as 40 premium "jackup rigs" that are located in several different regions around the world.
Ensco ($7.4 billion market cap) has the type of solid balance sheet and cheap shares that earn high marks from my Graham-based model. Its current ratio is 3.19, easily topping the model's 2.0 minimum, and it has more than four times net current assets ($1.05 billion) as long-term debt ($248.6 million). It's also selling for just 12.4 times trailing 12-month earnings, and 1.26 times book value.
Varian Medical Systems, Inc. ( VAR ): Based in Palo Alto, Calif., Varian ($8.2 billion market cap) makes technologies that treat cancer and other conditions using radiotherapy, radiosurgery, proton therapy, and brachytherapy. It also makes X-Ray imaging tools used in medical and scientific fields, and for cargo screening and industrial inspections.
Varian gets high marks from my Warren Buffett-based model. This approach looks for firms that have decade-long histories of increasing earnings per share, and Varian fits the bill -- it has upped EPS in each year of the past decade. The strategy also likes firms with enough annual earnings that they could, if need be, pay off all their debts within five years. Varian has annual earnings of about $380 million, which it could use to easily pay off its $16.1 million in debt in less than a year, a great sign.
The Buffett-based approach also digs back 10 years into a company's history to look for consistently high returns on equity. A company should have averaged a 15% ROE over that time, with no single year below 10%. Varian has averaged a 25.2% ROE over the past decade, with the lowest single year being 16.9%. That's a great sign, and an indication that the firm has the "durable competitive advantage" Buffett looks for.
AT&T Inc. ( T ): This Dallas-based telecom giant ($167 billion market cap) gets high marks from my Peter Lynch-based "stalwart" strategy, thanks to its high annual sales ($124 billion) and moderate 16.7% long-term earnings per share growth rate. (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term rate.)
Lynch, one of the greatest mutual fund managers of all-time, found that big, steady stalwarts tended to offer protection during downturns or recessions, and usually kept several in his portfolio. He famously used the P/E/Growth ratio (which divides a stocks price/earnings ratio by its long-term growth rate) to find undervalued stocks, and for big stalwarts he adjusted the "growth" portion of the equation to include dividend yield. Thanks in part to its impressive 6.1% yield, AT&T has a yield-adjusted P/E/G of just 0.39, which falls into my Lynch model's best-case category (below 0.5).
Lynch also looked for firms with manageable debt, and my Lynch-based model targets companies with debt/equity ratios below 80%. At 59%, AT&T makes the grade.
The TJX Companies ( TJX ): Based in Massachusetts, this big off-price retailer is the owner of such popular chains as T.J. Maxx, Marshalls, and Home Goods. It didn't just weather the Great Recession -- it actually increased earnings and sales throughout the difficult period, as consumers turned into bargain-hunters.
TJX ($19.7 billion market cap) is a favorite of both my Buffett- and Lynch-based models. The Buffett approach likes that it has upped EPS in each year of the past decade, and has almost twice as much in annual earnings ($1.4 billion) as debt ($788 million). It also likes TJX's impressive 37.2% average ROE over the past 10 years.
My Lynch-based model, meanwhile, considers TJX a stalwart because its long-term EPS growth rate (19.1%) falls in the moderate 10% to 20% range. It likes the stock's 0.72 yield-adjusted P/E/G ratio, and reasonable 25.4% debt/equity ratio.
Ameron International Corporation ( AMN ): Ameron makes a variety of products used by chemical, industrial, energy, transportation and infrastructure firms, including water transmission lines; fiberglass-composite pipe for transporting oil; and infrastructure-related products like ready-mix concrete and lighting poles.
Ameron is a favorite of my Graham-based model. A small-cap like this ($640 million) might not seem like a defensive play, but when you look at its balance sheet and share price, you see it has the "margin of safety" that Graham was known to look for. The firm has a current ratio of 3.2 and just $23.4 million in debt vs. $322.5 million in net current assets. It's also selling for just 1.26 times book value and 13.9 times three-year average earnings (Graham used the greater of average three-year EPS or trailing 12-month EPS).
I'm long ESV, T, TJX, and AMN.