3 Safe Haven Stocks in Today's Market
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The bond market hasn’t been the greatest place to be for the average investor. Anyone who had invested in bonds is now seeing coupon values decline (especially on the longer-dated securities). A flight to safety should involve a mix of cash and stocks.
Investors should look to hold lower beta (beta is a measure of stock price volatility) names like Coca-Cola (NYSE: KO), Procter & Gamble (NYSE: PG), and Johnson & Johnson (NYSE: JNJ).
Before we talk stocks, let’s talk about the economy
Th Federal Reserve has been increasing the size of its balance sheet through the purchase of bonds and mortgage backed securities for quite some time. Currently, the Federal Reserve has around $2 trillion in mortgaged back securities and Treasury securities.
The Federal Reserve had stated in a recent announcement that it may consider tapering of its bond purchase program towards the end of the year. This bond tapering is heavily dependent upon whether or not the economy can meet the short-term targets set by the Federal Reserve. The Federal Reserve will only end its quantitative easing bond purchase program if the economy were to grow in a 2.3% to 2.6% range, and if the PCE inflation were to reach 2%. For now, the economy isn’t generating that much inflation, or that much growth, but in the future, it eventually will. Because of this, bond investors are exiting in droves.
Right now, the Federal Reserve is purchasing $45 billion worth in longer-dated treasury bonds per month. Over the next five months, the Federal Reserve will buy $225 billion in bonds. All those bond investors who have sold their bond positions will most likely purchase stocks. The types of stocks that will be purchased will be the non-cyclical, low-beta, income earning stocks.
Currently, Coca-Cola has an 18.6 forward earnings multiple, Johnson & Johnson has a 15.84 forward earnings multiple, and Procter & Gamble has a 19.10 forward earnings multiple. The earnings multiple of these three companies is higher than the S&P 500 forward P/E ratio of 14.6. The stocks are trading at a premium due to the overwhelming demand for safe stocks. Unlike other industry experts, I believe that the demand for these safe haven stocks will go even higher, driving the prices of these three companies to greater all-time-highs.
Investors will get a compelling mix of stock appreciation and dividend yields when buying these three companies.
Refreshing, isn't it?
Coca- Cola is projected to grow earnings by 8.3% per year over the next five years. The stock also compensates investors with a 2.79% dividend yield. The company’s growth will be driven by raising the prices on its Coke and chips products, increasing the area of distribution and introducing new bottled beverages (Diet Coke was a real hit remember?). Management remains optimistic of the company and believes in its 2020 vision of doubling system sales. If that is the case, then we can expect a consistent stream of revenue and net income growth.
The company has a large presence in emerging markets, and according to the World Bank, the GDP growth of emerging markets, excluding China and India, will be 4.5% over the course of 2014 and 2015. Based on macroeconomic indicators, and management's forecasts, we can assume that Coca-Cola’s growth will be on track.
Don’t forget the toilet paper
Procter & Gamble is one of my most favorite investment opportunities right now. The company sells everything from Duracell batteries, Charmin paper, Gillette shaving cream, Tide laundry detergent, Dawn dish-washing detergent, etc. The company’s products are more recession proof than a can of Coke (but to be fair a can of Coca-Cola goes far).
Procter & Gamble is expected to grow earnings by reducing the cost of operating its business by $10 billion. Currently, analysts are anticipating the company to grow sales by around 3%. Currently, the company earns $10.7 billion, assuming a $992 million contribution from revenue, and an additional $10 billion from the cost cutting, and you can assume that, by 2016 (time frame for cutting costs) the company will earn $21.7 billion. The forecast indicates that the company’s earnings will double in the next three years.
This is why the 15.8 earnings multiple is reasonable. The company also compensates its investors with a 3.13% dividend yield.
Biotechnology a bond hedge
Johnson & Johnson is one of the most successful biotechnology companies in the world. The company has a compelling line-up of drug offerings over the next five years. With 11 new products being launched since 2009, 10 potential new molecular entities (FDA new drug approval reports), and 25 line extensions by 2017. Over the past five years, the pharmaceutical segment has been more or less flat because of a declining drug portfolio. However, the flat sales in its pharmaceutical segment are expected to turn around based on future product developments.
The company has a unique pipeline of products that will provide treatment for HIV, type 2 diabetes, colitis, hepatitis C, schizophrenia, and leukemia.
Analysts expect the company to grow earnings by 6.28% per year over the next five years. The company compensates its investors with a 3.07% dividend yield.
The projected rate of growth is pretty low; analysts have conservatively estimate growth. When you consider the fact that pharmaceutical drugs aren’t very price sensitive (which lead to high profit margins), and the number of retiring baby boomers will be exponential, you should anticipate the cost of healthcare to go up. If that’s the case, then the company’s portfolio of drugs should be able to grow earnings at rates higher than just 6.28%.
Coca-Cola, Procter & Gamble, and Johnson & Johnson will continue to appreciate in this environment of bond market volatility. There are only so many safe havens in the stock market, and of them, these three are probably the most practical.
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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Johnson & Johnson, and Procter & Gamble. The Motley Fool owns shares of Johnson & Johnson. 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!