3 Diverse Stocks for Your Portfolio
Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Do not place all your eggs in a single basket, echoes an old saying. United Technologies (NYSE: UTX), Honeywell International (NYSE: HON), and General Electric (NYSE: GE) have taken the saying to heart. Their sheer size is only a footnote when looking at the many branches and sectors in which the companies are present. Having returned to an upstream path after the recession, let's see which one is the most rewarding.
Few companies were able to successfully navigate through the last recession. United Technologies is one of them. Sure, its stock price took a dive, but recovery took only 12 months. Now, the company has found steady growth, making itself worthy of further analysis thanks to urbanization, and acquisitions.
In most western countries, the migration from the countryside to the city was completed during the last century. In China and India, the story is different, and is increasing the demand for United’s products. Heating and ventilation systems, safety and security systems, and elevators are the most popular articles in the firm’s portfolio. In comparison with the West, elevator availability in China and India is well below the average. Additionally, the company has undertaken an internal restructuring in order to improve cost efficiency and retain its market leading position.
Another important sector where United has good prospects is aerospace. The industry has been hurt by the recession and the Sequester (cut in U.S. budget). However, the company acquired Goodrich and AIE to strengthen its portfolio. Keep in mind that Aerospace Systems and Pratt & Whitney generated almost 40% of total revenue in 2012. And, even if the Sequester does cut the budget significantly, the firm can take refuge in the increasing demand for commercial airliners.
Management has been great for two reasons: capabilities and dividends. United has proven to possess an executive board powerful enough to dictate a new path, and to follow through with positive results. The quick recovery from the last economic recession provides enough evidence. Additionally, shareholders have been rewarded kindly, and the company holds the highest dividend among competitors. Evidence can be seen in the return of 70% of free cash flow during the last seven years. Besides the stock valuation (17 times P/E), United is a buy because of its finances and history of rewarding shareholders.
Diverse stock #2: Honeywell International
Another company that withstood bad economic weather is Honeywell. Diversification among several industries and sectors, coupled with different cycles, helped maintain its revenue and cash levels. Aided by internal restructuring and acquisitions, the company held on to its leading market positioning.
On the restructuring front, the company chose to place its focus on its core businesses, shedding away non-competitive operations. In line, the acquisition of RAE Systems and UOP have further widened its portfolio and vertically integrated the conglomerate. Now, the company can offer the complete gamut of gas detection and safety solutions. Meanwhile, UOP gave the company, and the chemicals branch especially, a much-needed boost on operating margins.
On another count, the introduction of new products by Honeywell will draw a new pool of customers. Worthy of noting are: a new series of brake pads and a Wi-Fi enabled thermostat. Also, commercial airliners’ resurgence will spill over some benefits; via jet engine design and flight instruments, the firm will generate more revenue. But, most notably, the company has interesting growth potential in China where investment is already under way.
Dividends for Honeywell are not as attractive as those of United. Nevertheless, the stock is similarly priced at $80, with a P/E of 20 times, and the company’s financial indicators are above the industry averages. Hence, it is recommended to buy this stock too.
Diverse stock #3: General Electric
There are a few monsters that nobody wants to confront. General Electric is one of them. The recent economic slowdown put some pressure over its management and finances. Nonetheless, the firm has escaped its bad fortune, and is currently on an upward path. Let us analyze GE’s fundamentals to unmask its growth potential.
The last recession sunk its stock price, from $44 to $8.50, a true shareholder’s nightmare. The stock has entered a new cycle, giving investors a new chance to cash some bucks. As the airplane industry picks up, GE will reap benefits from engine building. Also, management has done away with many of the firm’s inefficient branches. Such approach has allowed the company to set an upward trend on all financial indicators. Last, focusing on renewable energies is already giving the company an edge over competitors as consumer tendencies change.
GE has a proven management. Many argue that it did not foresee the recession, gravely hurting those who owned a piece of the pie. Although the recession could not be foretold, management has been quick to react and recover.
Yes, the stock price fell apart and no dividend was paid; nevertheless, revenue and cash flow levels were sustained, and debt was reduced. GE could not get rid off its Capital Services branch, which is still in need of more fine-tuning, but the financial uptrend is helping this sector.
Currently, GE stock trades at $23 with a forward P/E of 12 times, making it a cheap stock. Also, analysts remain positive about the firm’s earnings and revenue estimates. Given its proactive management, aerospace and energy industries' expansion, and cheap valuation, it is recommended as a buy.
Well, size will give an important leverage over the market. However, size alone will be of no use. Hence, the stocks here analyzed possess both, size and diversity. They are present in many different industries and are conducted by capable managements. Consequently, the choice between one and the other depends on stock price, and dividends.
GE pays the smallest dividend, yet holding the most room for growth. United Technologies is the most expensive but offers the highest dividend. Meanwhile, Honeywell is in a middle position and is recommended as the best buy since its history is solid and future also looks bright.
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Damian Illia has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. 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!