2 Stocks To Buy And Forget For The Long Term.
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing for the long term can be tough, but I believe one of the best methods is to find, buy, and hold a stock that offers a product that will always be in demand. Any investor investing for the long term needs to consider products that will always be in demand, and there is nothing that will be in demand for longer than food. People will always need food and they will always need it cheap.
So where would an investor place his money to take advantage of this long term trend? Well, there are three main sectors:
1. Retailers - as long as the big retailers keep their shelves stocked there will be customers, and there is no need to worry about the rest of the company.
2. Suppliers of equipment - as the world's population grows and the demand for food picks up, there will need to be faster ways of harvesting, sowing, and feeding.
3. Fertilizer - the world will always need more fertilizer to grow more food, faster.
The cheaper of the pair is WMT, although this could be due to its glacial growth rate. The company has achieved a 5-year compounded sales growth rate of 4%, which is less than 1% per year. Costco, on the other hand, trades on a relatively high P/E ratio of 24 – although the company has achieved a 5-yr sales growth rate of 8%, double that of Wal-Mart. I am prepared to overlook the growth rate, however, as Wal-Mart is nearly 5 times the size of Costco, so growth is going to be significantly harder to come by.
Despite this, Wal-Mart does look cheap on a Price to Free Cash Flow ratio, at 27.5 compared to Costco’s 30. Wal-Mart also wins when it comes down to profit margins, as the company has almost double the profitability margin of Costco.
This bigger profit margin gives a bigger free cash flow, resulting in a better dividend for shareholders from Wal-Mart.
The one issue I believe these retailers have is liquidity. For instance, the quick ratio of both companies is <0.60, as the majority of current assets are held in inventory stock. Unless there is a significant drop in customers then there will be no problems with this.
Despite its sluggish share price performance over the past few years, I will stick with Wal-Mart as my choice stock. It has everything you want in a hands-free lazy buy and hold stock. Costco right now is just too expensive.
Despite the retailers, there are other ways to play the ever-continuing demand for food. For example the most recent acquisition of Warren Buffett is John Deere, a company that manufactures all kinds of farm equipment. However, the issue with this company is the highly cyclical nature of its product.
John Deere has recently experienced a boom in sales as farmers re-tooled only after delaying orders in 2008 due to the nature of credit availability and state of the economy.
The cyclical nature of John Deere can significantly affect the EPS of the company leading to a rocky ride for shareholders --- Wal-Mart, on the other hand, has produced a steady increase in EPS, leading to a smoother ride for shareholders.
A better non-cyclical way to play the strong recurring demand for food would be through fertilizer stocks.
My first pick is Terra Nitrogen (NYSE: TNH), and I also believe this is the best company in the group. The shares have gone from strength to strength over 2012, rising over 58% excluding dividends, which added another 10% to the gains. Like most of the fertilizer stocks, the company benefited from low natural gas prices, resulting in higher profit margins for the company. Terra Nitrogen has been one of the best returning stocks over the past 10 years – gaining around 10,000% compared to Apple’s tiny 7,000%
The second company is CVR Partners (NYSE: UAN). Formed by CVP Energy for the purpose of producing fertilizer, the company is the only one in North America producing nitrogen fertilizer. The company is going from strength to strength, making the most of its momentum and is expanding capacity up to 3,000 tons per day.
The CVR is expecting a significant double-digit increase in cash available for shareholders from its increased production, higher margins, and higher demand. This is good news for shareholders, as the company currently offers a 7.9% dividend, although this is about 20% higher than the EPS the company is currently generating.
Both Terra Nitrogen and CVR are publicly traded partnerships, and as a result distribute most of their income to shareholders. Although this can result in a high yield, it also means the yield income can be highly unpredictable. This unpredictability also extends to earnings, as demand for fertilizer is affected by many different factors around the world.
Although there is uncertainty, one thing is certain -- fertilizer will always be in demand.
Despite the unpredictability, my pick here will have to be Terra Nitrogen. Terra has really outperformed the market over the past few years and is set to continue with higher margins and returns on shareholder equity. This is complimented by a stronger yield over the past 5 years and a lower price earnings multiple.
Investing for the long term can be tricky, but investing in a sector that will always be in demand gives the investor peace of mind that the company will always have a market for its products. Based on that analysis I believe both Wal-Mart and Terra Nitrogen are the two stocks to buy and hold for long term growth.
RupertHargreav has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. 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!