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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
Oil may be the lifeblood of industry, but coffee is the lifeblood of the working class. For years, Green Mountain Coffee Roasters (Nasdaq: GMCR ) has seen amazing growth from its Keurig single-serving coffee machines, which have made millions eliminate the morning pot of coffee in favor of make-as-you-go java. But aggressive short-sellers along with an SEC investigation helped let the air out of Green Mountain's lofty stock price. Will the coffeemaker-maker get a much-needed jolt? Below, we'll look at how the company does on our 10-point scale.
The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.
Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.
When scrutinizing a stock, retirees should look for:
- Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
- Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
- Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
- Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
- Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.
With those factors in mind, let's take a closer look at Green Mountain Coffee Roasters.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$7.2 billion||Fail|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||2 years||Fail|
|Stock stability||Beta < 0.9||0.81||Pass|
|Worst loss in past five years no greater than 20%||(4.9%)||Pass|
|Valuation||Normalized P/E < 18||36.17||Fail|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Streak of dividend increases >= 10 years||NM||NM|
|Payout ratio < 75%||NM||NM|
|Total score||3 out of 8|
Source: S&P Capital IQ. Total score = number of passes.
With only three points, Green Mountain Coffee Roasters isn't giving conservative investors much of a morning wakeup. With no dividend and an earnings multiple that's still quite high even after the stock's big pullback, Green Mountain needs to resolve some of its problems before investors can feel more comfortable about its future prospects.
From a business perspective, Green Mountain has had a lot of things go its way lately. Its K-Cups now have much greater exposure on retail shelves, and the company has signed up major distribution partners to broaden its sales. Starbucks (Nasdaq: SBUX ) made big news earlier this year when it reached an agreement with Green Mountain to produce and market K-Cups, rather than coming up with its own rival single-serve machine to fight the Keurig. Similarly, newly public Dunkin' Brands (Nasdaq: DNKN ) has gotten on board with its own K-Cups as well, not wanting to miss the bandwagon.
But the company faced a bear attack from hedge fund investor David Einhorn, who argued that accounting concerns, high valuations, and expiring K-Cup patents would combine to bring the stock lower. Sure enough, when earnings came out, Green Mountain missed estimates for the first time in years.
Still, Green Mountain has some leverage. Coffee Holding (Nasdaq: JVA ) gets about half of its revenue from Green Mountain and Keurig-related sales. Caribou Coffee (Nasdaq: CBOU ) also has a close relationship with the company. That state of affairs makes the entire industry dependent to some extent on Green Mountain -- and therefore it's in all those companies' best interest to have Green Mountain succeed.
For retirees and other conservative investors, though, the lack of dividend is extremely troubling. Moreover, the relatively tame year-to-year stock price changes mask a whole lot of volatility within calendar years. Even with shares at much lower prices, it's a tough sell to recommend Green Mountain as a play for anyone but the most risk-tolerant retirement investor.
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.
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If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."