3 Stock Tips You Can't Live Without

Unfortunately, the world is filled with deceptive stock "tips" that are designed to rip you off. It shouldn't be this way, as those providing investment advice should do so with your best interests in mind, not theirs. With that in mind, I'd like to offer you some advice -- some stock tips, so to speak -- that should prove to be much more valuable than any tip you'll hear at that party this weekend.

Stock tip No. 1: Competitive advantages matter
A competitive advantage is a company's edge over its peers that gives it the ability to generate premium returns for its investors. Warren Buffett has famously termed this advantage as  a company's "moat," which can be anything from patent protection to its visionary leadership. The stock tip here is to find a company that has a competitive advantage that can endure through all business cycles.

National Oilwell Varco (NYSE: NOV  ) is one good example. CEO Pete Miller has summed up his company's moat by saying, "No well is drilled, nor any drilling rig exists, without some equipment on it from National Oilwell Varco." The company can boast of this advantage because it's captured 60% of the market share in its industry. While the company's business is affected by the volatility of oil prices, it's a business built to last the test of time, as evidenced by the fact that it's been in business for more than 170 years.

Stock tip No. 2: Smart capital allocation is imperative
If there's one thing companies know how to do, it's spend shareholder money. Unfortunately, not all spend it wisely, and all too often companies expend to grow in an effort to build an empire. That usually doesn't turn out too well.

On the other hand, companies that grow with shareholders in mind typically produce phenomenal returns over the long term. Take ExxonMobil (NYSE: XOM  ) , which, while it's taken a lot of flak for not being able to grow its oil and gas production in real terms, has grown each share's interest in its production volumes by 5% annually over the past five years:

Source: ExxonMobil investor presentation.

Its nearest competitor, Chevron (NYSE: CVX  ) , has grown production per share by only 2% annually. The key is that when Exxon invests capital, its average return on that invested capital over that same period was just under 25%, while Chevron's return on capital employed averaged in the high teens. This advantage helped Exxon make stronger returns, which then allowed it to plow more cash back into share repurchases and therefore increased production per share by a greater amount. That philosophy has built an empire that's not likely to crumble anytime soon.

Stock tip No. 3: Beware of debt
As I mentioned, some management teams are too focused on building their empire. Doing so can have disastrous effects, one recent example being Chesapeake Energy (NYSE: CHK  ) . The problem here is that the company used debt to fund its ambitious growth plan, and when the natural gas bubble burst, Chesapeake was left scrambling to dig itself out of that hole. Now the company has been forced to sell assets at less than ideal prices to meet its multibillion-dollar funding gap. Even as natural gas prices have risen, the company is still struggling to make ends meet, and a lot of investors have been burned in the process. That's why I can't stress this point enough: Beware of companies using debt to grow, especially when profits are economically sensitive, because what can go wrong, unfortunately, is what usually does go wrong.

Foolish bottom line
Most stock tips feed an investor's portfolio for a day or two of profits, if you're lucky. By adhering to these three stock tips, you can feed your portfolio with consistent profits for decades to come. While we all want that get-rich-quick stock tip, slow and steady is the name of the game to win this race. 

For those seeking a real stock tip you might want to take a deeper look at National Oilwell Varco. It is perhaps the safest investment in the energy sector because of its industry-dominating market share. This company is poised to profit in a big way; its customers are both increasing the number of new drilling rigs and updating aging fleets of offshore rigs. To help determine if it could be a good fit for your portfolio, you're invited to check out The Motley Fool's premium research report featuring in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now to claim your copy.


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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 May 25, 2013, at 3:21 PM, notthisagain wrote:

    And yet when I hold my curser over the ticker for Chevron and Exxon, Chevron is the one that is matching the S&P and Exxon is 15% below the red line. How does that work with your explanation of shareholder value and return to investors?

  • Report this Comment On May 25, 2013, at 8:27 PM, TMFmd19 wrote:

    Look a little longer term. Over the past decade Exxon has doubled the S&P.

    -Matt

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