Beat the Taper: Part 2

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As the taper is set to start in September, there is bound to be some volatility in the markets, so in this two part series I have put together a taper-proof portfolio.

The aim of this portfolio is not to try and avoid the volatility stemming from the taper but to fully acknowledge it, looking to invest in companies that are good investments for the long term and will not be significantly affected by short term volatility or an economic slowdown.

These are the contenders:

  1. Merck
  2. Philips 66
  3. Crocs
  4. AT&T (NYSE: T)
  5. Ocean Rig (NASDAQ: ORIG)
  6. Bunge (NYSE: BG)

In Part 1 I covered the investment thesis for picks Merck, Philips 66 and Crocs; in this part I am looking at AT&T, Ocean Rig and Bunge.

Defensive telecoms

AT&T is bound to come under pressure when the taper finally occurs. Due to the company's high dividend yield, investors have sought out the stock over the past few years as treasury rates have collapsed. Now that treasury rates are back on the rise, investors are selling down high yield stocks like AT&T in favor of the risk free T-bills, bonds and notes.

However, as one of the country's main telecoms providers, AT&T has a strong future outlook with earnings expected to grow at least in line with inflation for many years to come and this should support the dividend.

Moreover, AT&T is looking to take its experience overseas, to the beaten-down European telecoms sector, a highly lucrative area of investment, where 4G penetration is rising rapidly. While an investment has not yet been announced, AT&T is doing a lot of probing in the region and an acquisition will be a huge boon for AT&T for the long term. Europe offers the company a new area of growth outside its home market, where smartphone penetration is growing at one of the fastest rates in the world, giving AT&T an edge over its peers here in the US.

That said, one of AT&T's biggest issues is debt - there is a lot of it. Fortunately, AT&T is not in a precarious position. For a start, the company has been busy over the last few years, locking in low rates and 15% of the company's debt is now maturing between 2038-2042 at a yield of <6%. In addition, the company is holding a lot of debt from acquisitions, which is high yield junk debt such as Southerwestern Bell Tel 7% maturing 2015.

Realistically, AT&T's debt should not be an issue as most of the acquired junk debt can be re-financed at a lower rate and the higher coupon debt expiring soon should be able to be rolled over at rates which should be lower than the ones currently being paid. Furthermore, with 15% of debt locked into longer maturities and the junk debt to be rolled over at better rates, even a rise in the base rate will not hit AT&T as hard as many think.

Hunting for black gold will always be lucrative

Ocean Rig is up next. Set to benefit from rising demand for ultra-deep-water drilling over the next few decades or so, Ocean Rig looks like a great long term investment.

Ocean Rig is one of the most undervalued oil & gas drilling companies in the sector and the company is still trading at a discount the value of its assets; worth $22 per share. Debt stands at 6.2 times EBITDA, although this looks to be manageable as the majority of this payment comes after 2016 with smaller repayments due in 2013 ($301 million) and 2014 ($341 million). Free cash flow should be in the region of $300 million a year for the next few years.

In addition, Ocean Rig already has 6 years' worth of revenue lock in with its order back log. So, although I hesitate to say it, the company's revenue is almost a certainty and the future looks bright.

Farming will always be in demand

Bunge is my third and final choice as it is a solid play on global growth. Although the company missed estimates for second quarter earnings, management believe that there is plenty of potential ahead in the third and fourth quarters as record harvest in the US boost processing and trading volumes.

There are also positive signs for the company in Brazil, where yet another year of record crop yields are predicted after excessive planting following the US drought last year.

Bunge's earnings are highly volatile and the company's performance is linked more to the movement in crop prices, environment and farm yields than anything else so the company does not have clear future.

However, rising populations and limited farmland dictate that the long term outlook for the company is positive. In particular, as many crops such as sugar and soy are currently trading at very low prices due to record crops from the US and Brazil. These prices are not going to stay low, however, as many farmers are losing money at these prices and excess supply should dissipate over the next two years, boosting crop prices and Bunge's profits. 

Foolish summary

All in all, the next few months will be bumpy as the Fed withdraws stimulus that the market has been addicted to over the last few years. However, investors can seek protection in these six companies, which all show potential for long-term growth and little reliance on the Fed's policies. 

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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