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Is Level 3 Communications a Stock for the Long Term?

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Being able to retire rich, or at least comfortable, is the goal of almost any investor. However, it's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50-59 said that they had, on average, about $29,000 saved up. With pensions all but gone, and Social Security targeted for cuts in the future, it's hard to count on anyone but yourself. But $29,000 isn't going to cut it for most people, so you've got to get involved in the stock market in order to grow that nest egg. Getting in the game is the easy part; choosing the right stocks is the hard part.

Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:

  1. Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
  2. Dividends: Most retirees need a combination of both growth and income, as they'll be depending more and more on their portfolio to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proven to outperform non-paying dividend companies over long periods of time.
  3. Growth: Investors love dividends, but everyone wants to see their stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
  4. Low volatility: Retirees want to invest in great growth stocks just as much as anyone else, but they also want to be able to rest well knowing that their portfolio won't be taking them on a roller-coaster ride. At the end of the day, most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the gyrations of the market.

Although some companies are definitely more geared toward retirees, which companies you choose to invest in will be dictated largely by what you already have in your portfolio. Small, mid, and large caps can all play a role in your investing strategy, so I chose to evaluate all varieties of stocks in this regular series.

So how does Level 3 Communications stack up?
In order to check out the valuation of Level 3 Communications (Nasdaq: LVLT  ) , we can't look at just its P/E ratio, because that metric is currently not meaningful. That may seem unhelpful because it's hard to draw context for a company with no meaningful P/E. However, if a company doesn't have a P/E, it's usually because it had negative earnings that year, which in itself tells us that something hasn't quite been right. Normally we'd look at the historical five-year average P/E and compare it to the current one, but since we don't have one, that action is rather fruitless. The current P/E ratio isn't meaningful, most likely because of negative earnings, so unfortunately we can't compare its historical average to today's numbers.

Level 3 Communications doesn't pay a dividend. Although we'd love to see a dividend here, many companies pursue stock buybacks or have better use for their capital than paying a dividend.

Next, we want to ensure that Level 3 Communications' stock has the ability to rise over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to try to ensure future earnings growth. Over the past five years, Level 3 Communications has consistently posted net losses. Unfortunately, Level 3 Communications has run into its own share of problems, and the financial collapse of 2008 certainly couldn't have helped, either. So the company has been unable to grow earnings, which doesn't exactly mean that it won't in the future, but it's certainly not the greatest of signs.

One of the best measures of volatility is called beta. Beta measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that Level 3 Communications will move in tandem with the market; a beta of 2.0 means that the stock will move up twice as much as the general market, and vice versa. In this particular case, Level 3 Communications has a beta of 1.06, which is pretty low. Generally speaking, I like to see a beta below 1.2 for retirees. In this case, Level 3 Communications fits the bill.

Let's look at the competition
We've taken a look at Level 3 Communications, and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it to understand that particular company. Here are Level 3 Communications' stats when compared to three of its closest competitors:

Company

Current P/E

Dividend Yield

5-Year Net Income CAGR

1-Year Beta

Level 3 Communications NM 0% NM 1.1
AT&T (NYSE: T  ) 8.8 6.1% 32.9% 0.5
Qwest Communications (NYSE: Q  ) NM 4.8% NM 0.6
Limelight Networks (Nasdaq: LLNW  ) NM 0% NM 0.0

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful because of negative earnings.

Each company has traits to like and traits left to be desired. Either way, it's beneficial to look at the industry picture and not just Level 3 Communications in isolation.

Of course, I can't decide for you whether this is the best stock for retirement, but it has passed one of the four tests, which shows that this stock has some promise. Depending on which traits are most important for you, you'd be wise to look further into this stock for your portfolio.

Interested in adding any of the companies above to your watchlist? Click below to get the latest commentary and analysis.

Jordan DiPietro owns no shares. The Fool owns shares of Wells Fargo. 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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12/19/2014 4:00 PM
LLNW $2.84 Down -0.01 -0.35%
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