4 Safe Picks in a Shaky Market
Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has become a familiar headline over the last few years: Yields on treasury bonds hit new record lows again last week. This time investors were willing to give their capital to Uncle Sam for a decade for the low, low price of just 1.59% a year.
Incredibly, this price was being fetched the same week that the Fed released new estimates on inflation, pegging it at between 1.7 and 2% through 2013. In other words, bond investors are choosing to lock in losses in purchasing power just for a bit of protection from market turmoil.
While a secure 1.59% might sound good when markets are bouncing from one bad news story to the next, its just not an impressive number if you are looking for real, long-term capital appreciation. I think there are plenty of stocks that offer much better prospects, without giving up too much on the safety side. Here are a few examples, with numbers that do impress and have safety built right into them.
1) 3.0%: Coca Cola's (NYSE: KO) share of the global consumption of all beverages.
This beverage giant delivers almost 2 billion drinks to consumers, every day. That kind of penetration into the daily lives of millions of people is a key reason why KO could navigate the lingering effects of the 2008 global recession with just a minor 3% drop in net income.
Even during the worst economic environment in decades, the company managed strong growth in emerging markets and just a 1% drop in volume in North America. When consumers were cutting back on everything from restaurants to entertainment, their drink choices barely budged. Shares of KO are up about 9% this year, just ahead of the market's 6% return so far.
Bonus number: 2.7% - Coca Cola now pays an annual dividend yield that's a full 70% higher than 10 year treasuries.
2) 110%: Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) share repurchase level.
Super-investors Warren Buffett and Charlie Munger announced last year that they would begin "aggressively" purchasing their company's shares when they dipped below 110% of book value, which they consider to be well below the intrinsic value of the company. While they were clear that this doesn't represent a floor in the stock price, the confidence that these conservative investors have in their company's valuation speaks volumes.
Because Berkshire is such a well diversified conglomerate of businesses, it pulls profits from a number of steady sources including utilities and insurance and so it isn't as vulnerable to big market corrections. Shares of Berkshire are up about 7%, YTD.
Bonus number: 27.4% - The percentage by which Berkshire beat the S&P 500 in 2008. In a year when the market fell 37%, Berkshire's book value fell less than 10%.
3) 89% - Costco's (NASDAQ: COST) membership renewal rate.
This grocery warehouser collected almost $2 billion in membership fees last year, a 20% add-on to the company's gross margin. Besides being a strong indicator of consumer satisfaction, the company's stellar renewal rate gives Costco added flexibility to offer products at prices that competitors can't match.
It also provides a large customer base that delivers steady traffic to stores, in good times or bad. During the worst of the recession in 2008, the company's comparable sales in the U.S. only dipped a modest 2%, and the company generated enough cash to take advantage of real estate bargains and open stores at the fastest pace in years. Costco shares are up 10% so far this year.
Bonus number: 66 Million - The number of cardholders that the company counts as loyal members, coming from almost 40 million households.
4) 45% - McDonald's (NYSE: MCD) gross profit margin.
McDonald's is a profit powerhouse, booking 10 percentage points higher gross margins than competitor Yum! Brands over the last year. Brand power, operating efficiencies, enormous scale, and solid management are just some of the reasons that MCD rarely underperforms in a pinch.
Case in point: the company didn't miss a beat during the market turmoil in 2008 as it logged a 7% increase in comparable sales along with a solid bump in guest counts and profit margins. This is the only pick of the group that's lagged the S&P 500 substantially this year - by over 20% - bringing it to a relative bargain price of just 17 times earnings.
Bonus number: 3.17% - The company's dividend yield is double what investors can get from 10 year treasury bonds.
Bottom line
Investors looking for some safety in this market don't have to resign themselves to a 1.59% yearly return. There are much better options in solid companies with proven track records through hard times.
SigmaSwan owns shares of Costco Wholesale, McDonald's, and Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway, Costco Wholesale, The Coca-Cola Company, and McDonald's. Motley Fool newsletter services recommend Berkshire Hathaway, Costco Wholesale, McDonald's, and The Coca-Cola Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.
