When are Growth Stocks Appropriate for Retired Investors?
If you’re retired or approaching retirement, developing a strategy to fit your investment goals can be difficult. You want to invest conservatively and preserve the wealth you’ve accumulated during the past several decades. But you also want to continue to build your wealth.
There are a lot of reasons to keep building wealth after you reach your 50s or beyond. You’ve been accumulating wealth in the form of stocks, bonds, CDs, your home and other investments all your life and want to continue. Your portfolio might have taken a hit during the tech wreck or housing crisis. You want to build more wealth to weather any unforeseen storms. Or maybe you’re like me, and you enjoy investing and want to use your investment skills and continue to build your nest egg.
Whatever your reason for investing somewhat aggressively, you’re not alone. In a recent survey conducted by Cabot, investors in their 50s, 60s, and 70s are investing in moderate risk growth stocks to add to their wealth. It’s OK to invest in moderate risk stocks while approaching retirement age, or after retirement. You are older and wiser now, and after making a few investing mistakes in the past, you are confident of your ability to consistently grow your investment portfolio.
In my opinion, some growth stocks are appropriate for older investors and some are not. There are plenty of growth stocks available in the stock market, though, that will meet your goals. The trick is to develop a system to find the best stocks that will fit your needs.
A Simple System to Find the Right Growth Stocks
You don’t need a whole lot of data to find stocks for your retirement portfolio. Your broker most likely offers much of the information and data that you will need. You will want to keep it simple, and focus on stocks with desirable characteristics. You will want your companies to grow, you will want to invest in companies that are not overvalued, and you will want your companies to be sound investments.
First, look for companies with good sales and earnings track records. Past, present and future growth prospects are all important. IBD (Investor’s Business Daily) does a great job rating the growth prospects for companies. IBD’s “EPS Rating” measures earnings growth and extends from 1 (low) to 99 (high) with 85 considered very good.
Next, find companies with sound balance sheets and solid sales and earnings track records. Standard & Poor’s provides excellent “Quality Ratings” that will steer you in the right direction. Ratings range from A+ down to C-, with B+ or higher considered more than adequate.
The third minimum requirement that your stocks for retirement should meet is value. Investing in overvalued stocks will eventually lead to problems if you hold your stocks for more than a year. Again, Standard & Poor’s provides a “Fair Value Rank” which you can use to assess whether your stock choice is undervalued or overvalued. On S&P’s scale of 1 to 5, choose stocks with ratings of 4 or 5.
The best-qualified stock for your retirement portfolio today might be LKQ Corp. (LKQ). The company’s IBD EPS Rating is 85. Standard & Poor’s quality rating is A, and S&P’s fair value rank is 5. This company is totally qualified to provide well-above average appreciation during the next three to five years. Read my summary of LKQ below.
LKQ Corp. (LKQ: Current Price: 24.31) is one of the largest providers of recycled automotive replacement parts, with 100 sales and processing centers in North America and Europe. LKQ buys wrecked cars at auctions, salvages the reusable parts, and sells the parts to collision repair shops.
LKQ has established an enviable record of steady 20% sales and earnings growth during the past decade through its aggressive acquisition program. Since the company’s founding in 1998, LKQ has acquired 170 businesses including 13 purchases in 2014. Recent acquisitions and store openings have been equally spread out in the U.S., Canada and Europe. Acquisitions have played an important part in LKQ’s success, but existing operations have added significant growth, too. LKQ’s vast distribution network provides the company with key competitive advantages, including faster delivery and more in-stock parts than competitors.
In addition, the auto insurance giant State Farm has authorized the use of certified used parts to repair cars and light trucks damaged in collisions. The number of parts approved by State Farm is limited, but if other insurance companies follow suit and the list of parts is expanded, the opportunities for LKQ could be huge.
While sales and earnings per share are forecast to rise 11% in 2015, new acquisitions could drive sales and earnings 18% higher in 2015, although lower scrap metal prices received by LKQ could reduce earnings to some extent. Better than expected sales and earnings will help LKQ’s stock price rise considerably during the next several quarters. Rapid 18% earnings growth will carry well into the future if LKQ continues its acquisition program.
At 19.1 times current EPS, LKQ shares are reasonable, and the balance sheet is very strong and growth is steady and rapid. The company does not pay a dividend. I expect LKQ’s stock price to reach my Minimum Sell Price of 35.90 within one to two year. I recommend that you buy LKQ at the current price.
Lastly, please follow me on Twitter: I’m “@J_Royden_Ward” and I’ll be sending out at least one interesting tweet every day!
Until next time, be kind and friendly to everyone you meet.
J. Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More