Invest Downton Abbey Style
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Season Three of the huge PBS hit Downton Abbey premiered on Sunday and its many fans are agog over how the Earl of Grantham managed to lose his American wife Cora's entire fortune on one Canadian railroad stock. Now they may have to sell the Great House and its beautiful gardens. How dreadful! as the Dowager (Maggie Smith) would put it. The begging and handwringing now begins in earnest as Lady Mary tries to wrangle money out of her rich American grandmother, Mrs. Levinson (Shirley MacLaine).
If only the Earl had taken a few tips from his gardener on keeping an English garden in bloom. You need variety, m'Lord or as the Yanks call it, diversification. You need some perennials, that keep coming back for several years and some evergreens that will look lively year round and finally a few annuals that are the glory of one season but my, m'lord 'ow they grow!
Protection and Performance
You want some evergreens like holly with its prickly points to keep the prowlers away and stay green year round guv'nor. You want a defensive big cap, maybe a Pepsico (NYSE: PEP). Pepsico has an 18.52 P/E with a 3.10% yield. This Yankee company has an over 100 year old pedigree as a global provider of beverages, both still and sparkling as well as an ever growing portfolio of food brands. Pepsico is only a few points off its 52 week high and while it may not make the big bucks to save the Abbey it does have yield and won't ever go bankrupt. It's just a good name to tuck away for those rainy British days.
How about a drug company like British big pharma name GlaxoSmithKline ) with a generous 5.20% yield and an even better P/E of 13.33. This one has a market cap of $111.8 billion and has one of the best yields for a defensive big cap. It manufactures pharmaceuticals, OTC medicines, dental hygiene and skin care products, and nutritional beverages. GlaxoSmithKline also has a low beta of .55. Just last year it bought Human Genome Sciences of Maryland for its new FDA approved lupus treatment and itself has had some recent FDA approvals of a four-strain influenza vaccine and for raxibacumab, an anti-toxin for inhalation anthrax.
The Perennial Mid-Caps
Like perennial plants mid-caps are often the unsung but productive engines of growth for a pleasing portfolio reliably returning blossoms (or profits) year after year. One of the most unsung is Hillenbrand (NYSE: HI), a $1.4 billion market cap name which has morphed from being not only the Batesville Casket Company and a leading supplier of funeral products, but also a mid-cap industrial material handling dynamo with several acquisitions over the last few years, most notably of K-Tron, Rotex, and Coperion of Germany.
It has a 3.3% yield and a 13.90 P/E. While Hillenbrand beat on EPS expectations in November they merely met expectations on revenue. Net margins are still over 12%. Wall Street analysts like the name, sir, and rate it Outperform with a price target of $25.00. It's very close to that now and this is a name to wait for on a market pullback. Even if there's a manufacturing slowdown, remember, death care waits for no man.
The Dowager plaintively asks Lady Mary if there aren't some investments that may have been overlooked, "Some coal or gravel or tin perhaps?" The Dowager has a point; a mid cap commodity play would be a good cyclical addition to this fairly defensive, may I call it Victory Garden?
When you think salt of the earth think Compass Minerals ), a Kansas City based salt and potash miner. It has operations in the US, Canada, and UK. While it has a higher P/E than the rest at 25.22, its forward P/E drops to 15.99. It has a yield of 2.50% and has consistently raised that dividend.
Compass Minerals is held by the Market Vectors Wide Moat ETF as a holding of a name they believe to have a moat or sustainable competitive edge due to Compass Minerals' cost advantages. Compass can be thought of as an agriculture play as the Specialty Fertilizer segment has been doing well with the best growth in sales volumes since 2008 as reported on the Q3 call on October 29. However, salt sales declined from $40 million in Q3 2011 to $12 million due to last year's unusually mild winter and customers did not preorder deicing salt as they had reserves left over. Compass recently purchased rights to mine salt in Chile and this should lead to opening markets in Europe and Asia, also reported on the call.
A Spot of Growth
Good small caps don't stay small caps for long, especially not that rarest of flowers, a small cap with yield. Lithia Motors (NYSE: LAD) is an Oregon based auto franchisee and retailer with a 12.94 P/E and a 1.00% yield. The stock has almost doubled in the last year. Lithia's former CEO Sidney DeBoer was listed in July as one of the top ten small cap CEOs by Chiefist.com based on performance on metrics such as EPS growth, margin expansion, book value per share and return on equity. Sidney DeBoer is now Chairman of the Board and son Bryan has taken the steering wheel.
Lithia owns 86 stores in 11 states and analysts are initiating coverage at Buy like BB&T did in December. Lithia's market cap is just under $1 billion and with US auto sales looking rosy for both Ford and GM, Lithia is poised to rise even further than its 52 week high of $41.01. Lord Grantham would do well to buy a little of this auto retailer instead of a Canadian railroad as Lithia provides just the kicker of growth and yield that any portfolio could use.
Variety And Yield
Just like an English garden you want an abundance of bloom and variety of size and seasonality. These names are just the ticket for the Earl of Grantham to save the Abbey. Maybe you aren't trying to save a Great House for future generations but you surely could use a portfolio that will blossom with profit and yield year after year with cyclical and defensive, small, mid and big cap names all in different sectors. Now your portfolio is quite lovely, m'lord.
leglamp has no position in any stocks mentioned. The Motley Fool recommends Hillenbrand and PepsiCo, Inc.. The Motley Fool owns shares of Compass Minerals, Hillenbrand, and PepsiCo, Inc.. 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!