Investing Basics and Beyond
Core Holdings for Your Portfolio
McDonald’s and TJX
Investing in the stock market can be overwhelming or downright scary. The choices are endless, and a step in the wrong direction can result in steep losses, even for experienced investors.
Nevertheless, you shouldn’t put off investing until you think the “time is right.” Now is the best time to start. Procrastinating will not help you reach your goals. If you set reasonable goals, you can reach them, and we can help! At Cabot, one of our best features is that our editors conduct all of their own research, write all of their Cabot letters, and answer all emails from our subscribers. It’s a lot of work, but it’s worth it because our subscribers love us and stay with us!
Here are some tips for successful investing.
Minimum Investment: There are no rules when it comes to minimum amounts to invest in stocks, bonds, exchange-traded funds (ETFs) or mutual funds. Investing in stocks and bonds allows you to tailor-make your portfolio to meet your objectives. ETFs and mutual funds provide diversification without investing in a lot of individual securities.
Core Holdings: If you are starting to invest now, I strongly recommend investing in a group of “core” or primary holdings to start. Your core holdings should include leading companies in several different industries. Your companies should boast strong balance sheets with low debt and lots of cash. They should also have a long history of steadily growing sales, earnings, and dividends. In short, your primary holdings should be made up of companies that have been around for a long time and will continue to be around despite various crises lurking around the next corner.
Once you have established the core of your portfolio, you can then add other companies to help diversify your portfolio further and to tailor your portfolio to meet your objectives.
Objectives: I recently attended my daughter’s graduation from Dartmouth College. She is now ready to embark on what will hopefully be a very successful career. My advice to her about investing is a lot different than my advice to many of my subscribers who are retired. My daughter can invest aggressively, because she has several decades to create wealth. Retirees need to preserve their nest-egg, so they need to invest more conservatively.
Diversification: I am a strong proponent of diversification. If you invest in only a few stocks, then one bad stock can ruin your day and jeopardize your gains. I recommend investing in a minimum of 12 stocks. Twenty stocks are even better, if you have the time to adequately keep up to date on each and every stock.
Allocation: Not only should you invest in several industry sectors, your holdings should also be diversified in several other categories, such as: size, risk, U.S. or foreign and type including defensive, value, growth, cyclical and speculative. I maintain allocation objectives to make sure I do not become over-weighted in any one category.
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There are literally thousands of companies from which to choose, but only a handful possess near-perfect growth records. Many years ago, I developed a system to measure the growth consistency of a company’s earnings and dividends. Companies that have increased their earnings and dividends at least 10% in each of the past 10 years receive a perfect score.
Within my database of 1,000 stocks, only one company has a perfect score: FactSet Research (FDS). There are a number of other companies with near-perfect earning and dividend scores. Companies with near-perfect records of steady growth coupled with strong balance sheets and clear outlooks for future growth are generally worthwhile candidates for long-term investment.
Two of the most attractive very high-quality companies in my database are McDonald’s and TJX Companies. Both are well qualified to be included as long-term core holdings in your portfolio.
McDonald’s (MCD) operates 32,500 fast-food restaurants in 118 countries and generates $23 billion in sales. International sales have provided much of the company’s revenue and earnings growth during the past 20 years and now contribute 65% of total sales. Worldwide same-store sales increased 4.8% in April and May compared to an increase of 4.2% during the quarter ended 3/31/10. While international sales are leading the growth, sales in the U.S. are stronger than other U.S. restaurants because Americans are eating at less expensive restaurants, such as McDonald’s, to save money during the weak economy.
McCafe beverages, which include latte, frappe, and cappuccino offerings, have become a big hit. Free Wi-Fi access to the Internet and the new Breakfast Dollar Menu are also helping to attract diners. Sales increased 5% and EPS (earnings per share) rose 16% during the last 12 months. We expect sales and EPS growth of 6% and 10% respectively during the next 12-month period and beyond.
MCD shares are reasonably priced at 14.9 times forward 12-month EPS with an attractive dividend yield of 3.2%. MCD has raised its dividend by an eye-popping 25% per year during the past 10 years. The balance sheet is strong with modest debt and $2 billion in cash. McDonald’s financial history includes steady sales, earnings and dividend growth during the past 35 years. I recommend MCD as a buy now.
Another of my top choices for a core holding is TJX Companies (TJX). TJX is the largest U.S. retailer of discount apparel and home fashion goods with 2,700 stores in the U.S., Canada, Germany, Ireland and the United Kingdom. The company’s main chains are T.J. Maxx, Marshalls, Winners and HomeGoods.
Management believes the slow economic environment offers outstanding opportunities for growth. TJX opened more stores than originally planned in 2009 and renovated many of its existing stores. These moves attracted many new customers who were drawn to low prices and good-quality merchandise. We expect TJX to retain its newfound customers and expand its store base aggressively during the next couple of years.
Same store sales increased 4% in April and May 2010. TJX shares are undervalued at 12.9 times forward 12-month EPS. Sales and EPS will likely increase by a minimum of 8% and 10% respectively during the next 12 months and accelerate thereafter as new stores become more profitable.
TJX increased its dividend at the end of 2009 and has raised its dividend by 22% per year during the past 10 years. The dividend provides a 1.3% annual yield. The company has a strong balance sheet with a reasonable amount of debt and lots of cash. Sales, earnings and dividends have been growing steadily for the past 14 years. I recommend TJX as a buy now.
J. Royden Ward
For Cabot Wealth Advisory
Editor’s Note: Cabot Benjamin Graham Value Letter, of which Roy is the editor, has more on McDonald’s and TJX Companies, as well as dozens of other top-rated value stocks. Don’t miss out on those stocks and Roy’s latest recommendations, which will be out in the new issue next week. Get started today!