Adem is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A great place to look for new stock ideas is in Credit Suisse's "Focus List.” The Focus List has outperformed the S&P 500 in 6 of the past 9 years, sometimes by a wide margin.
To clarify, the Focus List isn't simply stocks that Credit Suisse has a "buy" rating on. Much like Goldman Sachs' Conviction Buy List, the Focus List is a select small number of stocks that Credit Suisse feels most bullish about.
With the second half of the year upon us, Credit Suisse believes that these stocks are set for gains.
There's a lot of talk about The Affordable Care Act (aka "Obamacare") and business, and most of it is bad. But do you ever hear people discuss who the potential benefactors of the law will be? I don't.
Every law or regulation has winners and losers, even if the overall business community suffers, winners will emerge. One potential winner would be a few select insurance companies, whom are poised to add as many as 45 million new customers, and clearly Credit Suisse feels that Cigna(NYSE: CI) will be a winner.
Cigna is a global health service company, with insurance subsidiaries that are providers of medical, dental, disability, life and accident insurance and related products and services. The stock has been on an absolute tear since Credit Suisse added it to the list (12/31); gaining over $30 per share this year alone, it has nearly doubled.
This stock has outpaced the S&P 500 by 20% this year, yet earnings are still set to make further gains over the next two years. The company is expected to increase earnings from the $6 range, to over $8 per share by 2015. That would make its current P/E ratio of 16 look much more attractive, somewhere below 10. It's quite impressive that such high growth is expected even after the stock has come so far, so fast.
Technically, a value
When it comes to value stocks, tech giant Oracle(NYSE: ORCL) is typically not the first name that comes to mind. This tech giant provides enterprise software as well as hardware products, services, and other products at the forefront of technology. Taleo, for instance, a staple applicant tracking and customer tracking business platform, is an Oracle product. Aside from the high tech products the company sports a P/E ratio of just 13, not bad considering the company has a five year earnings growth rate over 16%. That value, along with exceptional cash flows, could be a reason that Credit Suisse added Oracle to the Focus List in December of last year.
Seven months later, this stock is actually a rare Focus List name that has underperformed the S&P 500. That's not always a bad thing: if the business still has a lot going for it, you'd rather buy it at a cheaper price than an inflated one.
Despite the high tech product line, I think one of the biggest catalysts for Oracle is the possibility of a dividend increase. The company's paltry 1.5% yield could be much higher, and likely will be. Oracle is one of many "old tech" companies that still has dominant market share, gobs of cash, and great fundamentals, yet struggles to excite investors. So why not give some of that cash back to shareholders?
Return on capital at Oracle is around 14%, and its payout ratio is around 25%; there's more than enough cash to raise the dividend. So I say, buy it for growth now and love it for the dividends later.
Oracle holds dominant market share in its major markets, which contributes to solid cash flows. Investors will need to watch growth in database and application software licenses, which accounts for over 50% of revenues. If those hold up, the stock will as well.
Boring is beautiful
Like Oracle, Colgate-Palmolive(NYSE: CL) has underperformed the broader market this year, but that's about all these two businesses have in common. Unlike Oracle, this "Focus List" name is not a particularly sexy business. This company makes toothpaste, soap, deodorant, and other household items.
Colgate-Palmolive is a different type of investment; it's a "margin of safety" dividend stalwart. The stock is actually near a 52-week high and has done quite well. It only lags the market because it's not a growth stock. The trade-off, naturally, is that businesses like Colgate-Palmolive hold up better in tough times, and that's why I like the stock here.
Let's face it Fools, we've had a ridiculously wonderful rally in the stock market, but nothing goes up in a straight line forever. At some point the market will sell off, and that's when this solid dividend payer will shine.
The dividend yield currently trades just above 2%, not particularly inspiring, because the stock has risen a good deal this year with the market. But that dividend has been paid, without a single interruption or any dividend cuts, since 1977. It was raised again this year and, considering that the company pays-out less than 50% of earnings in dividends, it's due for another increase soon.
There are very few things I know to be true in this life; one of them is that you want to own Colgate-Palmolive for safety and dividends. Should the market, or the economy, falter I will guarantee you that people will buy toothpaste and deodorant. And if things do great from here, then wonderful, the dividend payouts will keep going up as well.
It's not sexy, it's not a "get rich quick pick," but truthfully it makes a lot of sense here.
Focus, focus, focus!
Does it make sense to “copy” Credit Suisse's Focus List? The track record certainly would suggest so. But these stocks make sense on their own merits, because of their underlying fundamentals.
It certainly doesn't hurt to have exclusive company though, and the Focus List is a great starting point to find some (potentially) great investments.
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