3 Safe Bets for Conservative Investors

The only certainties in life are death and taxes...and to a lesser extent, marriages. That suggests that businesses serving such needs will experience stable demand for their products and services, making them perfect investment candidates for conservative investors.

Mar 7, 2014 at 2:52PM

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Source: Service Corporation

In today's rapidly changing world, there's no guarantee that your next investment won't end up with the same fate as the seller of buggy whips decades ago. As a result, it is much safer for conservative investors to place their bets with the certainties in life, including death, taxes, and even marriage.

Examples of such stocks include death-care company Service Corporation International (NYSE:SCI) , tax-preparation services provider H&R Block (NYSE:HRB), and wedding planning information-services provider XO Group (NYSE:XOXO).

Till death do us part
While advancements in technology have disrupted many industries, such as book publishing and music, death-care providers are thankful that humans aren't immortal yet. The number of deaths in the U.S. has increased by a compound annual growth rate of approximately 0.8% from 1.4 million in 1935 to 2.5 million in 2010. While the growth rate isn't anything to shout about, the stability in year-over-year changes in deaths is remarkable.

Between 2000 and 2010, the number of deaths hasn't fallen by more than 3% in any single year. If you compare this with the drop in sales volumes for any industry or business during the global financial crisis, it becomes clearer why death-care stocks have certain investors interested.  

The best stock to capitalize on the stable demand for deaths is Service Corporation, the largest provider of funeral, cemetery, and cremation services in the U.S. Service Corporation is the outright market leader, with an estimated 13% market share of the death-care industry; its nearest competitor StoneMor Partners has less than one-tenth of its revenue. 

If an investor needs further assurance of the defensiveness of Service Corporation as an investment, he or she needn't look further than Service Corporation's strong revenue backlog and consistent free cash flow generation. Service Corporation's revenue backlog of $7.6 billion as of December is approximately three times its annual revenue. In addition, Service Corporation consistently generated positive free cash averaging about $273 million from 2009 to 2012.

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Source: H&R Block

Paying Uncle Sam
If there is any pain greater than paying tax, it's the act of filing it. Compared with the opportunity cost associated with spending time on filing tax returns (versus running the business) and the potential penalties with erroneous tax returns, the cost of hiring a tax-preparation services provider is small.

Industry statistics speak for themselves. Tax filings have increased steadily at 1%-2% per year from less than 60 million in the 1950s to more than 140 million currently. Furthermore, about 60% of Americans rely on service providers to help them file their taxes, and this ratio has remained stable for the past decade.

The best proxy for the tax-filing market is H&R Block, the largest tax preparer globally with close to six decades of experience under its belt. It is estimated that one in six U.S tax filings is handled by H&R Block, and H&R Block has seven times the volumes of another tax-preparation service provider, JTH Holding. H&R Block also has an unrivaled presence, with 10,000 locations countrywide. In addition, in a relationship business like tax filing, its long-tenured tax professionals averaging about eight years of experience give it another edge.

The Affordable Care Act will be another boost to H&R Block given that any household using an Advance Tax Credit must file a 2014 tax return in 2015. JTH estimates that there will be between 1.5 million to 2 million new tax filers with the Affordable Tax Act.


Source: XO Group

Wedding bells ring
While weddings aren't as certain as death and taxes, about 2 million couples tie the knot every year. About $70 billion is spent on weddings every year, with half of this amount devoted to jewelry, gifts, and honeymoons. Recent trends have been positive.

Since the global financial crisis in 2008, 2012 marks the first time that wedding budgets have grown for two consecutive years in a row. At $28,527, the 2012 wedding budget is the highest it's been in five years. Also, more brides are becoming less price-sensitive; only 26% of brides claimed that their wedding budget was affected by the economy compared with a ratio of 34% in 2009.  

XO Group is a media company focused on weddings. Its bridal brand The Knot is one of the dominant players in the space, with more than 200,000 Facebook followers. More importantly, if brides are willingly to pay so much to make their weddings perfect, the demand for free or low-cost offerings is even greater.

Close to 60% of its revenue comes from the fees that companies pay to place their advertisements on its websites, which offer brides reviews of wedding vendors, advice, and other informative articles. XO Group also derived 19% and 17% of its 2012 revenue from publications and e-commerce, respectively. Most brides benefit from either free information provided by XO Group's websites or low- cost options such as magazines. In addition, XO Group leverages its brand for cross-selling opportunities for its e-commerce business.

The financial numbers are the best evidence of XO Group's resilience. It increased its revenue in every single year for the past decade, notwithstanding the global financial crisis in 2008 and 2009.

Foolish final thoughts
Although all three stocks don't offer skyrocketing growth prospects, they give their shareholders peace of mind knowing that they will be in business for the foreseeable future.

What's the Fool's favorite stock?
Every investor's definition of a good stock is different. I like stocks benefiting from stable demand and that are less likely to be disrupted by advancements in technology or changing consumer preferences. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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