These Are the Market's Strongest Buys

The hottest investments in 2009 have been, in no particular order:

  1. Emerging market stocks, especially Chinese stocks
  2. Bonds
  3. Risky, debt-laden U.S. stocks

Following the bludgeoning we took last winter, it's no surprise that investors have either sought lower volatility in the fixed-income market or have tried to regain some ground in more volatile equities.

Those sectors may have been the market's strongest buys last November, as the market was extremely risk averse, but not this November. No, the market's strongest buys today are in the very areas that investors at large have been ignoring this year -- namely high-quality, U.S.-based blue chips.

Boo this man!
In his most recent quarterly letter to investors, GMO Capital's Jeremy Grantham argued that "Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets."

It's these companies, after all, that not only have the balance sheets to withstand another shock to the economy in the coming years, but also generate a substantial amount of their earnings overseas -- a bonus for those who believe in the emerging market growth story and the need for diversification away from the U.S. dollar.

Incredibly, investors have largely shunned a number of high-quality U.S. blue chips in favor of the aforementioned three alternatives.

Consider:

  • Stock funds dedicated to the BRIC countries -- Brazil, Russia, India, and China -- have had inflows of $4 billion year-to-date.
  • Through September, taxable and municipal bond funds took in $267 billion, versus just $4 billion for stock mutual funds.

And that means the savvy investor can find some excellent opportunities.

Best buys now
With many investors' attention turned elsewhere, here are five U.S. blue chips that deserve some extra research right now.

To find promising, long-term candidates, my search targeted companies with:

  • Return on equity greater than 15%
  • Interest coverage (EBIT/interest expense) over 10
  • Price-to-free cash flow below 20
  • More than 20% of sales overseas

Company

Return on Equity

Interest Coverage

Price-to-Free Cash Flow

% of Sales Overseas (TTM)

Cisco Systems (Nasdaq: CSCO  )

16.8%

21.6

15.6

46%

Oracle (Nasdaq: ORCL  )

22.6%

13.5

12.6

56%

Wal-Mart (NYSE: WMT  )

19.9%

10.9

18.5

25%

Best Buy (NYSE: BBY  )

18.6%

19.3

17.5

22%

Procter & Gamble (NYSE: PG  )

17.1%

12.4

13.7

61%

Data from Capital IQ, as of Nov. 6. TTM = trailing twelve months.

Now compare these high-quality companies with the financial health of two stocks that have led the junk rally since early March: Las Vegas Sands (NYSE: LVS  ) and International Paper (NYSE: IP  ) .

Company

Return on Equity

Interest Coverage

Las Vegas Sands

(10.4%)

0.2

International Paper

(14.3%)

3.6

Surely congratulations are in order for investors who bought into Las Vegas Sands and International Paper in early March when the market was avoiding risky assets -- both have since become multi-baggers.

But these "frog to prince" stories have not only played by now, but another downturn in the economy could further rattle these highly leveraged companies.

Coming full circle
At the end of the day, investing is not just about buying low and selling high. It's about being comfortable and understanding what you own. If you don't, you're more likely to panic and make poor trading decisions. In today's market you can have the best of both worlds through buying quality U.S. large caps at good prices.

Simply put, they're the market's strongest buys right now.

I've already given you five ideas to get started, but if you want to find similar ideas for yourself, start by looking for companies with the following qualities.

  1. Built to last 100 years or more
  2. Dominating growing industries
  3. Helmed by committed and proven management teams
  4. Governed by the highest corporate values
  5. Consistently increasing shareholder value

Our Motley Fool Stock Advisor service believes that Costco fits the bill perfectly, and it has a place in the team's list of recommended "Core" stocks for any portfolio. If you'd like to learn about the other stocks we're recommending at Stock Advisor, a free 30-day trial to the service is yours. Just click here to get started.

Already a member of Stock Advisor? Log in at the top of this page.

Fool analyst Todd Wenning wishes you a happy Thanksgiving. He owns shares of Procter & Gamble, a Motley Fool Income Investor recommendation. Best Buy is a Motley Fool Stock Advisor selection. Best Buy, Costco, and Wal-Mart Stores are Motley Fool Inside Value recommendations. The Fool owns shares of Oracle, Best Buy, Costco, and Procter & Gamble. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (95)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 06, 2009, at 8:07 PM, drericrasmussen wrote:

    A surprising wrong turn. This article begins by pointing out the value of investing in solid, sound firms with significant exposure to export markets. That's a good idea, especially since emerging markets, led by the BRIC countries are leading the world's growth and will continue to do so for years.

    Then, in a sudden, tire-screeching turn the writer recommends that massive exporter.....Costco! Costco? A firm with outlets nearly all in the US and Canada? Maybe the writer was recalling the recently-concluded "World" Series. And Costco is in broadly based, all-product retailing, an industry that has high culural barriers and systems that are easily replicated pirated or "reverse engineered." Costco is a fine firm. Not a bad investment. Buti it is not in emerging markets, where the long term growth will be.

    Pay attention his initial screen. Ignore his stupid right turm. Or jerk. ("Ow! My neck!")

  • Report this Comment On November 07, 2009, at 10:16 AM, snappycappy wrote:

    I wonder if you misread CSCO (Cisco Systems) as Costco??

  • Report this Comment On November 07, 2009, at 10:26 AM, Northern7 wrote:

    Article refers to both.

  • Report this Comment On November 07, 2009, at 12:44 PM, RegLeCrisp wrote:

    Costco has stores around the world, though mainly in NA as stated. Costco is brilliant at high volume buying and consumer delivery. It's truly an emerging market enabler. Barriers to market entry may be significant but their private label operation allows entrenched brands to rest easier as their products can still be sold under the 'Kikland' brand. The fact that they have yet to truly gain an international foothold makes them an even more compelling buy, though this fact does conflict with one of the main points of the article.

  • Report this Comment On November 08, 2009, at 4:34 AM, foolshand wrote:

    here are 3 stocks that everyone needs to take 10 minutes of their time to look at these 3 new technos breakthru ,,, which all 3 came out with more breaking news this past week.

    the first is BSRC

    the second is AMNE

    and the 3rd is UTRM.

    good trading everyone.

  • Report this Comment On November 08, 2009, at 1:43 PM, JakilaTheHun wrote:

    Yet another article that tries to blame others for the investing mistakes of the author. Just because you don't like the companies that rallied the most doesn't mean they are all "junk." There's nothing wrong with PG, WMT, or CSCO --- but let's not pretend you're going to earn a monstrous return on those stocks.

    Comparing higher-risk stocks in more volatile industries with low-risk "income" stocks is like debating the merits of Monty Python's Holy Grail and Schindler's List and concluding that Schindler's List was the better film because it was more serious. Nevermind that the former film never was meant to be a serious dramatic portrayal of a historical event.

    12 months from now, when the biggest winners are in sectors that are beaten down from the financial crisis and these safety stocks give you returns of 5%, I'm sure there will be more articles blaming those of us who can actually discern "junk" from companies that are priced like they are bankrupt, but that in actuality, are completely viable companies.

  • Report this Comment On November 11, 2009, at 1:52 PM, VegasMartin wrote:

    My approach to investments has been to look for companies with strong cash flows, solid balance sheets, that do 50%+ of their business overseas and it's been a fantastic approach. I dabbled in some small and mid-caps earlier, but quickly learned that the market turned its back on the small and mid-caps in October and that investors want to move away from risk and pile into something safer even if it means a smaller return. At least you don't have the downside risk in those small and mid-caps should the economy take another blow.

    http://www.ShootTheBears.com

  • Report this Comment On November 13, 2009, at 3:08 PM, solterraway wrote:

    What about stocks like (GRAN) Bank of Ganite, based in NC ten years ago was the best little bank in America and was trading around $28 per share. Now it's down to fifty cents per share. Has its management gone awry or is it going into bankruptcy? I' ve been holding this stock for a long time since my grandmother gave it to my mother who gave it to me. Terribly sentimental. But it used to be a superb bank. Should I hold it even at 7 cents per share? I won't lose much since it was a gift but its high valuation years ago funded my charitable giving. Any guidance appreciated.

  • Report this Comment On November 13, 2009, at 7:03 PM, wayne2009 wrote:

    Stocks that do not give dividends are only the gambling chips. You have no relation with the company at all. Long term investment does not make any sense to me. We all need to adjust our mentality to gamblers not investors. The money you gain from the stock markets are from those who loose, not the return from the company.

    For long term investment, first look only for those who give good dividends, like the companies in the good old days when people were still hornest, and then look for good managment and good balance sheet.

    I'm strongly against buying tech companies like Cisco. I bought it over $60.00 during dot com bubble, hold for almost 10 years, and the sold at $17.00. During the 10 years, they made money, I didn't get a penny of dividends. So what's the point of buying the stock except for gambling purpose?

    I recently, took a training class. The instructors told us that we have to throw away the idea of investment. No investment, only tradings, trying your best to sequeeze money from other fools.

    Do I favor gambers over investors? By nature, I favor investors. But the system was not set up for hornest investors.

    I believe if the Congress pass a law that all profitable companies have to give 10% of their net income for dividends. All investors have to pay 5% of the company loss if the company losses money. Then all the market crashes will be avoided. Because the investors will be more interested in the company's operation.

    But I'm only a fool. Who would listen to a fool, right?

    Wayne Fool 2009

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