Of all insight I've heard over these few crazy months, the most telling came from an investor who appeared on CNBC last fall and, being entirely serious, advised, "There're only two positions to be in right now: cash, and fetal."
I get it. Even with the recent rally, it's ugly out there. Many companies that overleveraged their balance sheets are permanently impaired and will likely never fully rebound. AIG (NYSE: AIG ) comes to mind. We had an unprecedented boom; now we're slowly trying to call out of an unprecedented bust. That's how markets work.
Even so, history tells us time and time again that market panics and forced sell-offs indiscriminately throw the good out with the bad. The "sell-now-ask-questions-later" mood of global investors is providing bargain-hunting investors with the sort of opportunities we haven't seen in decades. Use that to your advantage.
Using the wisdom of our 140,000-member-strong CAPS community, I've hunted down a few dirt-cheap, high-quality companies. Have a look:
|
Company
|
Recent Share Price
|
Forward P/E Ratio
|
5-Year Expected Growth Rate
|
TTM Return on Equity
|
Dividend Yield
|
CAPS Rating
(out of 5)
|
|
Eli Lilly (NYSE: LLY )
|
$32.86
|
7.17
|
2.85%
|
N/A
|
6%
|
****
|
|
Reynolds American (NYSE: RAI )
|
$45.29
|
9.53
|
5%
|
12.25%
|
7.5%
|
***
|
|
Molson Coors (NYSE: TAP )
|
$47.78
|
12.64
|
11%
|
7.69%
|
2%
|
*****
|
Data from Yahoo! Finance and Motley Fool CAPS, as of Sep. 21.
Let's break down the bullish argument for each one.
A closer look at Eli Lilly
During the height of election season last year, CAPS member saunafool wrote:
Here's a bet for you. Whoever wins the election isn't going to do squat about profit margins at pharmaceutical companies. Furthermore, no matter what happens to the economy, people are still going to take their medicine. All these companies are going to survive the turmoil better than most, and they'll still be standing, just like Elton John, 10 years from now, with compounded dividends aplenty.
Well, we now know who won, and we know what plenty of people think he'll end up doing to profit margins of insurance companies and drug companies.
But what's really happened in the past year? In anticipation, shares of health-care-related companies have been crushed -- Eli Lilly is down some 30%. The drug giant now trades at just seven times forward earnings, and has a 6% dividend. The odds profit margins will be squeezed so much as to make that kind of valuation still unattractive seems pretty remote, and only likely in the case of a full-fledged takeover of the health-care industry -- a prospect that now seems firmly off the table. And as saunafool noted, odds are that threats and fears will wane, and plenty of health-care industry giants will still do quite well for years to come.
A closer look at Reynolds American
So you're morally opposed to investing in tobacco companies? I don't blame you. Many people are.
But capitalism is all about choice. And for those of us who choose to invest in a sin industry like tobacco, the abhorrence of others is a wonderful thing. Companies like Altria (NYSE: MO ) and Reynolds American get left with long-term, sustainable, low valuations that in turn create huge dividend yields. Reynolds' yield current sits at a staggering 7.5%. Sure, the odds of big growth are pretty bleak. But a 7.5% return ain't bad in light of current headwinds the economy as a whole faces. For international exposure and a weak dollar play, check out Philip Morris International (NYSE: PM ) .
A closer look at Molson Coors
Now that we're on the topic of sin stocks, turn your attention to beer giant Molson Coors. CAPS member dantefromsomm summed it up nicely recently, writing:
SAFE HAVEN. I see that this company was strong through 2 market crashes. I plan to switch my holdings to stocks like this when the market gets over priced. DOES ANY ONE STOP DRINKING BEER IN A BAD ECONOMY????
Fair enough. Simple, and mostly true. "Beer is not recession-proof, but it's very recession-resistant" said Harry Schumacher, editor of the Beer Business Daily earlier this year.
So far, that's been the case. Last quarter, earnings grew over 20% from the same period a year ago. Next year, earnings are expected to come in at $3.78 per share -- a record, and enough to price shares at just 12 times next year's earnings. For a more diversified spirits company, check out Diageo (NYSE: DEO ) . You get the recession-fighting power of booze, plus a 4.5% dividend.
You take it from here
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