Several reports are circulating in the financial media that EPS growth for the S&P 500 member companies is slowing down to a trickle (or even poised for an outright drop) and P/E ratios are getting too high. Some analysts say that by later this year, earnings will only grow by single digits.
Should this concern the average retail investor?
Not if you invest for the long term and look for companies that have solid fundamentals in place. Let's discuss three businesses to consider for your portfolio.
This Sam is for you
Boston Beer (NYSE: SAM ) , the brewer of some of the most popular craft beers, has experienced strong growth over the recent past and the long term. EPS has appreciated more than 37% in the last quarter and 15% for the trailing 12 months, and it has averaged 23% for the past five years. The stock has followed suit, rising more than 80% since last November and tripling since 2010.
This strong performance will continue so long as the key fundamentals remain in place.
The company has little long-term debt, which will allow it to spend funds on research and development and new products, which Boston Beer introduces on a regular basis. This summer, its signature Samuel Adams Boston Lager brand was first offered in a can.
Boston Beer has a strong management team in place. Founder and chairman Jim Koch has given up the CEO duties but remains an integral part of the company's operations. He still has a vested interest in how Boston Beer performs. He even uses an old family recipe to brew the beer and has set up a sort of venture capital fund for up-and-coming entrepreneurs in the food and hospitality industry.
Finally, Boston Beer had more than $27 million in free cash flow available at the end of 2012.
A caveat (and potential negative) is that the stock is not a value play by any measure: Its P/E is above 40, its price-to-book ratio is greater than 10, and its PEG is higher than three. All are indications that SAM is overvalued. However, based on the strong fundamentals and projections of continued success, an investment in Boston Beer may be warranted for those needing a growth stock in their portfolio for the long term.
No Band-Aids needed
Johnson and Johnson (NYSE: JNJ ) , the monolithic maker of medical devices, pharmaceuticals, and consumer health-care products, is another solid company to consider. Johnson and Johnson is growing its earnings again after a brief lull in 2011 and 2012. On a TTM basis, EPS has increased by about 50%.
The company has been using acquisitions, such as Synthes, and new product introductions (several new Aveeno brand items were introduced recently) to expand.
It has a long-term debt-to-equity ratio of only 14%. This allows the company to use cash more efficiently to fund its extensive drug research and file lucrative, multiyear patents, which gives it a wide moat to fend off competitors.
Another selling point for Johnson and Johnson is its history of growing its dividend. It has increased the payout every year for the past half-century, pumping it up at a compounded annual rate of 14%. The stock is a good one to consider for a retirement portfolio.
Extra value for a dollar-menu price
Fast-food giant McDonald's (NYSE: MCD ) is another blue chip with good future earnings prospects.
The company has done an about-face on its menu offerings and advertising campaign. Late last year McDonald;s started emphasizing lower-priced items instead of the "Extra Value Meals" in order to increase profit and boost sagging same-store sales. The strategy seems to have taken hold: Same store sales are now on the upswing, and after a pause in earnings growth in 2012, McDonald's resumed its upward momentum this year, albeit at a relatively slow 2% pace so far.
The company's other fundamentals are in good shape. It has a manageable long-term debt-to-equity ratio of 0.88 and cash flow of more than $1 billion. Its P/E ratio of 17 is low compared to historical standards and industry rivals.
McDonald's is also a dividend grower, having increased the payout every year since it introduced one in 1976. It has a compounded annual dividend growth rate of 21%. This looks like another good stock for a retirement income portfolio.
The long and short of it
Even if the aggregate earnings of S&P 500 companies are poised for a slowdown, there are still businesses out there that will grow. Keep an eye out for fundamentally strong companies like the ones I discussed above, and you'll achieve long-term investing success in any market environment.
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