How to Beat the Bond and Gold Market

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Markets are usually volatile. One of my favorite sayings on Wall Street is that sometimes a market can be remain irrational longer than you can remain solvent. The meaning is so practical because sometimes it’s really hard to hold onto a crashing stock. I didn’t see a whole lot of people sit back and watch the Dow plunge back in 2007, 2008, and 2009--yet almost every financial professional was advocating investors to remain patient, to continue contributing, and above all to play it safe.

Anyhow, isn’t that what’s happening in the bond and gold market? Investors are being told that it’s time to double down, keep contributing, and to ignore the negativity. But is that really the right answer?

Here comes the economics

Fact is, investing in gold, silver, and commodities could be really difficult right now. The reality is the Federal Reserve has a lot of power. To draw a comparison, in astronomy the largest sources of energy are black holes and the sun. Well, in the world of finance, the Federal Reserve is both a black hole and the sun. It is a black hole in a sense that it sucks liquidity out of the system, and is the sun when it adds liquidity to the system.

Right now investors are a little worried about the Federal Reserve’s cut back to its open market operation (asset purchase program). If the Federal Reserve decides to not purchase bonds anymore, the demand for bonds will go down. This will result in rising interest rates and falling bond values. The general consensus is that investors should avoid longer-dated treasury securities.

Things aren’t exactly looking rosy in the gold market either. Investors are dumping the precious metal because of the risk of hyper-inflation has ended because the Federal Reserve has given a clear message that it will end its quantitative easing (asset purchase program) in order to curb concerns of rapid inflation, or market distortion.

Therefore, both gold and bond investors are being burned by a large scale asset rotation. Investors should look into investing into coupon-like stocks. I will focus on three of the most safe, least volatile names I can think of currently.

Three safety plays

<img alt="" height="475" src="http://g.fool.com/editorial/images/56093/7-6-13-list-stock-pic-1_large.png" width="733" />

Source: YCharts

The three stocks are steady growers: Coca- Cola (NYSE: KO), Wal-Mart (NYSE: WMT), and McDonald’s (NYSE: MCD). Over the past 5-years, the three stocks have been able to appreciate in value consistently.

We want consistent growth. These three companies are intended to counter both, gold and bond market volatility. At the moment, investors are more likely to preserve capital by buying these three companies rather than buying physical gold and bonds over the next five years.

Company specifics

McDonald's

McDonald’s has been heavily focused on improving the quality of its dine-in and drive-through experience. The company has been offering a broader menu selection, and is even offering to serve breakfast at certain locations 24/7.The company is also remodeling a lot of its restaurants in order to improve the overall buying experience. Granite counter-tops, larger menu selection, along with 24/7 WiFi has been able to keep the restaurant franchise competitive against both Burger King and Jack in the Box.

Analysts, on a consensus basis, anticipate the company to grow earnings by 8.61% per year over the next five years. The company also compensates investors with a 3.08% dividend yield. The stock trades at an 18.5 price-to-earnings multiple. Restaurants trade at a 23.8 price-to-earnings multiple on average, which is higher than McDonald's price-to-earnings multiple, which implies that McDonald's trades at a reasonable valuation.

Wal-Mart

Wal-Mart has been criticized for long-lines, and the lack of customer service in some of its store locations. In order to counter this issue the company has been hiring temp workers in order to achieve greater flexibility in work scheduling, and to improve the overall shopping experience. Wal-Mart has been very disciplined at returning cash to shareholders.

Going forward analysts on a consensus basis anticipate the company to grow earnings by 10.49% per year over the next five years. The growth is also accompanied with a 2.5% dividend yield.

The stock trades at a 14.8 price-to-earnings multiple, which is reasonable when considering the historical consistency in the company’s earnings growth. Wal-Mart's price-to-earnings ratio is below the sector average at 20.5.

Coca-Cola

Coca-Cola is another favorite of mine. The company is focused on growing sales. The company’s 2020 vision is to double sales between 2010 and 2020. The company is well on track to meeting its own internal expectation. The company can increase the price of its coke products, and increase the territorial distribution of the products in order to meet this goal.

Investors should remain optimistic of the company’s long-term sales and net income growth. Analysts, on a consensus basis, anticipate the company to grow earnings by 8.3% per-year over the next five years. Coca-Cola also compensates investors with a 2.76% dividend yield.

The stock trades at a 21.2 price-to-earnings multiple, which is somewhat higher than the average 20.7 price-to-earnings multiple for beverages. The stock trades at a higher price-to-earnings multiple because investors are willing to pay a higher premium for non-cyclical stocks, and because of the competitive advantage that Coca-Cola has when compared to other competitors. Forbes ranks Coca-Cola the 3rd most powerful brand and is superior to Pepsi in terms of branding.

Conclusion

A great stock portfolio for capital preservation would include Wal-Mart, Coca-Cola, and McDonald’s. The growth is predictable, and the historical stock performance indicates that investors are willing to pay higher prices for the three companies so as long as the three companies consistently grow earnings. The dividends are an added component that makes the three companies far superior to owning treasury bonds or gold.

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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and McDonald's. The Motley Fool owns shares of McDonald's. 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!

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