The market is in an uptrend, but so far it’s been a slow slog with lots of setbacks. Yes, the market is making higher highs and higher lows, but the backsliding is so quick and thorough that it’s not getting very far. It’s like taking 10 steps forward and nine steps back.
Part of the reason is fear: investors with little confidence in the market are using each push into new high territory as a selling opportunity. There’s too much fear for greed (the engine of bull markets) to really take hold.
There’s more evidence of investors’ lack of confidence visible by looking at the types of stocks that are outperforming in today’s environment. When fear is high, investors are less likely to take a flyer on a new, unknown name, preferring instead to put what money they are investing into conservative, well-known, slower-growth, often blue-chip names. And those are the types of stocks that have performed best over the last few months.
Now, I don’t know how long this situation will last. Investors may get greedy again tomorrow, and start throwing their dollars at semiconductor stocks and small-cap pharmaceuticals. But the beauty of today’s conservative stars is that they won’t tank—that’s why investors are buying them today. If the bull market really gets going, today’s more conservative picks might underperform it, but they’re not going down the tubes. So with that said, here are three stocks from last week’s Investment Digest that fit today’s preference for less adventurous fare.
The Walt Disney Company (DIS) was recommended by Dennis Slothower, editor of Stealth Stocks, based on its defensive credentials:
“In the Great Depression, people went to the movies to get their minds off their troubles—and this time is no different. The Walt Disney Company (DIS) has had some blockbusters in ‘The Avengers,’ ‘Brave’ and the soon-to-be-released ‘Iron Man III.’ Disney’s 2Q12 earnings increased 29% to $0.63 from $0.49 in the prior-year quarter. The strength of its core brands—Disney, Pixar, Marvel, ESPN and ABC—and its ability to grow franchises, such as Iron Man, across its businesses have enabled Disney to shatter domestic box office records. This Dow Jones Industrial stock is making new highs for the year, and I see that trend continuing. According to my numbers, DIS should be selling in the $70 range. It is currently trading around the high $40s, so DIS has large upside potential. Place a sell stop at 25% below your entry price. As the stock rises, continue to raise your stop so that you are trailing the Friday close by 25%.”—Dennis Slothower, Stealth Stocks, July 2012
Illinois Tool Works, Inc. (ITW), recommended by Moneypaper’s Vita Nelson, is a conservative pick with the bonus of a 2.6% dividend yield:
“Founded in 1912, Illinois Tool Works, Inc. (ITW) manufactures components and fasteners for automotive, construction and industrial uses, as well as specially engineered products, machinery and consumables for the automotive, construction and food and beverage industries. Its growth strategy includes acquisitions, which have helped it expand to over 800 operating companies in 58 countries. Foreign sales accounted for 59% of the $17.8 billion in 2011 revenues.
“The company is expected to earn about $4.22 per share in 2012 and $4.70 per share in 2013, compared with $3.74 in 2011. The annual dividend, which has been increased for 48 consecutive years, now totals $1.44 per share, for a yield of 2.6%. Insiders own 4.5% and Northern Trust owns 9.9% of the 477.4 million shares, which is down from 617.3 million in 2003.
“You might think that a company making fasteners, filters, and equipment for the past century would hold little appeal for the average investor. But that’s only true if you define the average investor as someone who’s only interested in the next hot stock or a quick profit, a common misconception. The truth is that it takes decades to assemble a conglomerate of efficient operations that can operate in a highly independent, decentralized manner that each manage to produce profits that grow year after year, allowing the corporation to reward its shareholders with an ever-expanding dividend. If you examine the nature of the companies that have been succeeding for decades rather than months or weeks, a common thread emerges: Provide the simple things at the highest quality on a consistent basis and persistent growth will follow.”—Vita Nelson, The Moneypaper, July 17, 2012
Lastly, this next company isn’t household name, and is smaller than DIS and ITW, but a quick look at a chart of Aegion Corp. (AEGN) will tell you everything you need to know about its reliability. It was recommended by Roger Conrad, editor of the top-ranked Utility Forecaster:
“Aegion Corp.’s longtime core business has been repairing water and wastewater pipelines, primarily for municipalities and other government entities. This business has been in a major slump for several years, though the company has been able to continue winning contracts, including a $6.3 million deal with Springfield, Missouri, and a $5 million deal with Aurora, Colorado, both locked up in June. The lion’s share of growth, however, is coming from pipeline protection and rehabilitation applications serving the energy and mining industries globally. Aegion expects a return on invested capital of 10% in 2012 and is working to raise that to 15% in subsequent years. That translates to earnings excluding one-time items of $1.40 to $1.60 for this year, putting the current share price at less than 10 times profits. Aegion isn’t a utility, and its business model is subject to the waxing and waning of its customers’ fortunes. Most of these, however, are quite reliable payers. This factor, along with low debt, means low risk for the company. Up about 20% from last year’s recommendation, Aegion is still a buy up to 20.”—Roger S. Conrad, Utility Forecaster, July, 2012
While the market could get over the fear hump tomorrow, all three of these names—AEGN, ITW and DIS—are great buy-and-hold candidates for today’s and tomorrow’s market.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Dick Davis Investment of the Week
