Beat the Market: Buy High on These Companies
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When I first started learning about investing, I heard the age-old adage “Buy Low, Sell High” everywhere. Turns out, that’s not the best advice. For one, it can make investors hold on to stocks too long in the hopes of getting back to even. Two, it scares investors away from good stocks trading near their highest prices.
In fact, research shows that buying when the market makes a new 52-week high is much more profitable than buying when it hits a 52-week low, and crushes the average market returns as well.
With that in mind, here are three stocks fresh off of new 52-week highs that make great investments.
Last December, Arris (NASDAQ: ARRS) bought the Motorola Home division from Google (NASDAQ: GOOG) for $2.05 billion in cash and $300 million in stock. A month later, the company sold half of Google’s stake to Comcast (NASDAQ: CMCSA) giving them each 7.85% of the total outstanding shares.
What’s important is Arris now has two very big partners with direct interest in the company’s success. Arris will be the beneficiary of licensing deals with one of the biggest innovators in tech, particularly as they move into the high-speed video and internet delivery market. The deal with Comcast ensures that the company’s largest customer isn’t going to drop them.
The acquisition of Motorola Home also creates a more diversified customer base for Arris. Last quarter, the company reported 51.7% of total revenue came from just two companies – Comcast and Time Warner Cable. By adding a slew of smaller cable companies that rely on Motorola set-top boxes, the company now has a stronger foothold on the market.
Even while the company is hitting a new high, it looks like it has room to continue growing. The company is already seeing traction with its newly launched Moxi home gateway and E6000 router. Order backlog at the end of 2012 was $222.6 million compared to $148.5 million at the end of 2011. And the company is starting to diversify internationally, where big opportunities exist, specifically in China.
One of the few financial companies to have completely retraced back to its pre-financial crisis highs, American Express (NYSE: AXP) looks like another great buy-high opportunity. Where competitors Visa and MasterCard focus on the nascent e-wallet revolution, American Express is following the money and investing heavily in the e-commerce market.
Most recently, the company made a partnership with Twitter to sync its credit cards with the social network, allowing cardholders to purchase items through special hashtagged tweets. This comes after establishing relationships with Facebook, Foursquare, and Microsoft’s Xbox Live.
E-commerce has grown into a $1 trillion market, and grew at 21.1% rate last year. American Express is beating its competition to the punch as it harnesses the growing number of social network users to bring customers and vendors together with their credit cards. As money transforms from paper and metal to bits of data, American Express is positioned well to ride the trend of electronic payments.
Church & Dwight
Church & Dwight (NYSE: CHD) sports a portfolio of over 80 household brands. Chief among them are names like Arm & Hammer, Trojan, and Oxiclean. What makes it formidable against bigger competition like Procter & Gamble or Colgate-Palmolive is its unique product mix, international growth opportunity, and excellent cash flow conversion.
The company has struck an excellent balance between premium and value brands. Last quarter, value brands accounted for over 40% of total revenue as consumers feared the impact of the fiscal cliff. With the hike in payroll taxes, consumers are seeking out more value brands, and Church & Dwight is positioned extremely well to capitalize on a poor macroeconomic outlook.
Currently, Church & Dwight only derives 18% of sales from outside the United States. Whereas Procter & Gamble already does the majority of its business abroad, Church & Dwight is still getting started. The company already has some very well-established international brands such as RUB A535 (Canada’s Icy Hot) and Grava (for upset stomachs).
Church & Dwight just started expanding its Arm & Hammer laundry and cat litter products to Canada and Mexico. It’s also extended its toothbrush and toothpaste worldwide as it grows the Spinbrush brand. Additionally, it acquired UK-based Batiste last year to expand its presence in Europe.
Perhaps the best aspect of Church & Dwight is its fantastic ability to produce cash for investors. Church & Dwight has a historically strong balance sheet, with free cash flow quadrupling over the last 10 years. Cash conversion has been over 100% for the past six years, including a 118% mark in 2012.
A high amount of cash on hand allows the company to make new acquisitions, as it did with Batiste and Avid Health last year. It also allows the company to invest in its supply chain and production capacity. And, most importantly to investors, it allows it to continually raise its dividend which currently has a payout ratio of less than 40%.
Buy High, Sell Higher
All of these stocks are floating around their 52-week highs. That doesn’t mean you shouldn’t buy them. There’s a reason these share prices have risen so high in the first place, and it’s because these companies are all doing things right. So go ahead, jump on the bandwagon, and buy high.
adamlevy has no position in any stocks mentioned. The Motley Fool recommends American Express and Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!