3 Stocks To Buy And Forget For 2013

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

It is the start of a new year and everyone wants to know the best investment of the year ahead. However, picking future winners is very risky, and trying to predict market trends for the next year can leave investors confused and broke.

To eliminate the factor of guessing future market trends I have selected some prospective stocks for the year ahead, based not on their predicted future performance but on their past performance and ability to continue that trend going forward.

I have picked three stocks based on three main criteria:

  1. Safety – A relatively safe option that is not linked to a commodity or has a heavy reliance on economic conditions. A stock that has a history of decent returns on shareholder equity and looks to continue these low volatility returns into the rest of the year.
  2. Cyclical – A stock that is a decent cyclical play on the current economic environment and looks good as a value investment. However, the candidate must have a strong history of shareholder returns and must have shown the ability to last through rough economic periods.
  3. Yield – A classic and what some might call 'boring' yield play that offers safety and a strong income for the passive part of the investor’s portfolio.

1. Safety

Stock Pick: Visa (NYSE: V) or MasterCard (NYSE: MA)

My only pick that has two winners, as it is hard to differentiate between the two. Both Visa and MasterCard have put in sterling performances over the past year, and this trend should continue -- with the economic recovery in the US and worldwide set to maintain its slow return to previous health.

Both Visa and MasterCard offer payment networks that skim a service cost off the top of every transaction. This makes both Visa and MasterCard relatively safe options in the financial world, as they rarely have any exposure to consumer credit and the pitfalls that this comes with. MasterCard is currently trading on a forward P/E of 20 for next year, and Visa is slightly cheaper on a P/E of 19. However, both companies do generate strong profit margins of above 20% and ] are forecast to improve EPS by a compound 20% over the next 5 years. Neither of these network providers have any debt and both have solid cash balances. MasterCard could be the stronger performer, however, as the firm has produced an average return on shareholder equity of 30% over the past 5 years compared to Visa's average of 10%.

Finally, both MasterCard and Visa have seen share price gains of 40% and 50%, respectively, over 2012, although income investors could be disappointed, as both companies yield around 1%. However, the strong cash balances and cash flows could lead to further shareholder returns.

2. Cyclical

Stock Pick: Caterpillar (NYSE: CAT)

My cyclical pick for 2013 will have to be CAT. I am a solid supporter of CAT because of its strong history of perseverance in hard times, as well as shareholder returns. Despite being sold off over the past year on global economic worries, CAT has the strength to pull through, as it has done many times before:

  • CAT has been around in different forms since 1906, surviving two world wars and the Great Depression.
  • Caterpillar is a great long-term investment, with total shareholder return in the top 25% of the S&P 500.
  • CAT has a return on investment almost double that of its competitors.
  • CAT has a 5-yr dividend growth rate of 7% compared to the industry average of 1.2%.

These reasons support the long term investment case for CAT, and right now the financial ratios indicate a bargain stock:            

 

CAT

Industry Average

P/E Ratio

 

9.70

17.50

P/E High - Last 5 Yrs.

42.90

 

P/E Low - Last 5 Yrs.

5.60

Price to Cash Flow (TTM)

6.70

13.60

EPS - 5 Yr. Growth Rate (%)

10.03

9.10

CAT is currently trading near the low P/E multiples seen in the financial crisis in 2008, even as the global economy has a significantly improved outlook. CAT is also trading on a significantly lower price to cash flow multiple than the rest of the group, indicating the market is overlooking the cash flow the company is able to produce. Finally, the 5 Yr. EPS growth rate CAT has been able to produce is above that of the rest of the industry.

3. Yield

Stock Pick: Altria (NYSE: MO)

Altria is one of the best stocks for total returns in the S&P 500 ever! Even though the company is significantly smaller than it once was, Altria is still going strong. With a solid portfolio of tobacco products being sold in the US, the free cash flow generated from this has allowed the company to invest within other areas, from beer in SABMiller, to smokeless cigarettes, wine, and finance. Altria spans many sectors with its products, and that why I believe it is a good defensive play for 2013.

Although Altria does not offer the best yield around, I believe it has the most diversified product base available in high yield opportunities. Although the company is facing headwinds over changing tobacco opinions worldwide, Altria is still managing to produce significant shareholder returns. For example, over the past 10 years Altria has paid out around $22.6 in dividends for every share, which equals a total return of around 480% when taking into account the capital gain in the share price. However, these figures are not taking into account the Kraft and PMI spin offs.

So those are my picks for a buy and hold investor in 2013. Judging by their performance over the last few years, I think they will be strong performers for many years to come.

Data Source: Motley Fool CAPS


RupertHargreav owns shares of Altria Group and Caterpillar. The Motley Fool recommends Visa. The Motley Fool owns shares of MasterCard. 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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