3 Stocks To Buy and Hold In Stormy Waters
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The market is currently uncertain, with the S&P 500 nearing multi-year highs, investor capital inflows at the highest since 2001, the debt ceiling just around the corner, and the earnings season, negative investors are hit with waves of news and opinion all offering different opinions on the market.
So where is a safe harbor?
Well to start I screened the S&P 500 for companies that have seen strong EPS growth of 15% or greater over the past 5 years. The past five years have been tough, and any company that has managed to grow EPS more than 15% has got to be doing something right. This returned a few results so then I screened these results for a quick ratio of greater than one, to prove the financial stability of the company. This reduced the results even more.
Finally, I screened the results for a debt to equity level of less that 50% to once again support the financial strength of the company. This final screen gave me 35 results.
With these 35 results, I carefully removed any cyclical stocks. Then I poured through the results to find stocks that had their 5-yr EPS growth spread out evenly over 5 years.
These are my results…
Google (NASDAQ: GOOG)
The Internet giant that everyone loves to hate has put in a decent performance over the past 5 years. Since 2008, the stock is up over 40%, although the company has not paid a consistent dividend during that time.
However, the company has not seen a significant drop in EPS over the period. The only major fall in EPS over the past five years was back in 2009, when EPS fell from $4 to $1.2 per share. The constant steady EPS growth at the company highlights the low cyclical nature of Google.
On the balance sheet side, Google has a strong one. The company has grown its cash balance from $5 billion in 2008 to $16 billion in 2012, reinforcing the strong recession proof nature of the company. This cash balance has been accumulated through the company’s strong free cash flow, which has risen from $1 billion in 2008 to nearly $3 billion in 2012. Over the same period revenue is also up over 100%. The average return on shareholder equity over the past five years has been 20% - highlighting further strength.
Chipotle Mexican Grill (NYSE: CMG)
Next on the list is the restaurant chain Chipotle. This company has been a serious under-performer this year, but over the previous five years it has really outperformed. The share price has gained 200% since 2008 as rising EPS have dragged it higher.
On the other hand, Chipotle's current high valuation leads me to believe that the company cannot be a safe haven in stormy waters. With such a high valuation any bad news would cause a significant correction in the share price. I have included in this list because some people might not be bother about the current high valuation.
Nonetheless, Chipotle has produced a ROE of 20% over the past 5 years and has a solid cash balance of $400 million, up from $100 million in 2008. This cash balance is reinforced with a free cash flow of $75 million (TTM) up from $0 in 2008.
Despite restaurants being a relatively cyclical natured business, Chipotle has shown that it has a strong business plan that can attract customers even when the market is tough.
National Oilwell Varco (NYSE: NOV)
Unlike the first two stocks I have mentioned, National Oilwell's shares have not really outperformed over the past few years. Well they have, the stock is up 250% since the beginning of 2009 but the stock fell 75% in 2008.
Despite this the company has actually grown its EPS 50% since 2008, however, a one off higher than average EPS result in the 4th Q 2008 has skewed the 5-yr EPS growth rate to only 20%.
Moving off the growth rate, NOV has maintained a solid cash balance over the period. Cash almost doubled from $2 billion in 2008, up to $4 billion in 2012. This has been bolstered by a good free cash flow averaging $300 million over the past 5-yr period. The company has also proved it can make decent returns with ROE averaging 14% over 5 years.
Unlike both Google and Chipotle, National Oilwell offers a dividend of $0.5 or 0.7% giving some income protection in tough times.
National Oilwell does offer a relative safe haven against cyclical market storms due to the nature of its products. As the company is involved in the rather less cyclical oil engineering sector the company finds its services are always in demand as the world consumes evermore oil.
Chevron (NYSE: CVX)
The final stock on my list is Chevron. Offering a 3% yield the company has the best dividend in the group. Furthermore, the stock is up nearly 100% over the 5-yr period.
Despite the fact that sales have remained stagnant over the past 5 years, the company has managed to grow EPS through share buybacks funded through its huge free cash flow - averaging $2 billion over the 5-yr period and sometimes heading as high as $5 billion.
On a balance sheet note, the company has $21 billion of cash and equivalents on its balance sheet and has produced an average ROE over the past five years of 20%. The dividend as I have already mentioned has only risen since 2008 now up around 70%.
Chevron is huge and this is the reason it is my star pick. The company will always be an out-performer over the long term due to its size and economies of scale.
These stocks are not guaranteed to provide a safe haven but over the past five years the economic environment has not been easy and each one of these companies has still managed to grow earnings. To add to this they all have solid balance sheets and non-cyclical business.
Buy: Chevron, National Oilwell and Google for a safe haven in an uncertain market.
Data Source: Finviz,YCharts
RupertHargreav has no position in any stocks mentioned. The Motley Fool recommends Chevron, Chipotle Mexican Grill, Google, and National Oilwell Varco. The Motley Fool owns shares of Chipotle Mexican Grill and Google. 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!