I admit it. Even though the evidence is overwhelmingly in favor of investing regularly and holding high-quality stocks over the long term, I'm a picky investor. Despite 35 stock market corrections of at least 10% (when rounded) that have been completely wiped out by bull market rallies since 1950, I have a hard time finding value in a market that continues to hit new all-time highs. As such, I haven't been very active in buying stock in 2016.
However, that all changed over the past two weeks and change. Since the end of October, this picky investor has purchased four new stocks. Despite a U.S. stock market that's sitting at an all-time high, I believe these four companies offer an excellent risk-versus-reward here.
The most recent addition is Silver Wheaton (WPM 0.17%), a streaming and royalty company in the gold and silver mining industry. Instead of traditionally mining gold and silver, Silver Wheaton provides upfront capital to mining companies looking to develop or expand a mine in exchange for a percentage of the gold or silver stream from that mine. These deals are often for the very long term or the life of the mine.
There are a number of advantages to this type of arrangement for Silver Wheaton. To begin with, the company receives production at an exceptionally low cost. As of the third quarter, Silver Wheaton's per-ounce cash costs were just $390 for gold and $4.51 for silver. Based on the current spot prices for these metals, it works out to a gross margin above $830 per ounce for gold and $12.50 an ounce for silver. In other words, physical metals would have to plunge for Silver Wheaton's profitability to come into question.
Secondly, Silver Wheaton has a large portfolio of producing mines, meaning its outlook isn't tied solely to one or two producers. The company has worked out production deals for more than one dozen mines, and during the third quarter those mines led to 7.7 million ounces of silver and a record 109,000 ounces of gold production.
The outlook for precious metals is also pretty lustrous. Even though Wall Street pundits worry about investors trading out of precious metals for stocks or bonds as interest rates rise, the opportunity cost of owning gold or silver remains very low. Remember, even if the Federal Reserve raises rates in December, its federal funds target rate will still be well below the current inflation rate. Tack on the uncertainties created by a Trump presidency, and increasing precious-metals demand with constrained supply, and we have what I believe is a recipe for higher precious-metal prices.
Valued at only 12 times next year's cash flow per share after its Q3 profit miss, and sporting a 1.1% yield to boot, Silver Wheaton has a good chance to outperform the market in the coming years.
Teva Pharmaceutical Industries
Another recent buy is Israeli-based drugmaker Teva Pharmaceutical Industries (TEVA 0.65%).
Teva had a bit of a rough day on Tuesday after the company reported its third-quarter results and modestly lowered its full-year forecast. Having previously forecast $22 billion to $22.5 billion in full-year sales and $5.20 to $5.40 in full-year EPS, Teva now expects revenue to come in between $21.6 billion to $21.9 billion with full-year EPS of $5.10 to $5.20. The company blamed lower revenue from new drug launches for the adjustment, but was also clear in pointing out that its slow launches aren't due to lost revenue. Teva merely expects growth to come in during 2017 and 2018 as opposed to the earlier end of the curve.
What's arguably the most exciting aspect of Teva is the recent closure of its Actavis purchase from Allergan for $40.5 billion. Though certain aspects of the deal have been a challenge, with Teva being required to sell some of its generic-drug businesses to appease regulators in select countries, the upside of the deal far outweighs these near-term speed bumps. Following its acquisition of Actavis, Teva now stands tall as the largest generic-drug manufacturer. Having such a commanding position should mean cost synergies and improved pricing power. In short, better generic-drug margins.
Furthermore, with QuintilesIMS Institute for Healthcare Informatics projecting that generic prescriptions written could grow to between 91% and 92% by 2020 from 88% now, Teva is set up to see a steady increase in volume on the generic side of its business.
As for branded therapies, I believe the concerns about multiple sclerosis blockbuster Copaxone have been overstated. Copaxone's patent expiration opened the door for generic entrants, and as a drug that once comprised more than 20% of Teva's annual revenue, most pundits believed it would strike a crushing blow to Teva's growth prospects. But, Teva managed to delay those entrants through legal finagling long enough to get an extended-release version of its MS injectable on pharmacy shelves. With a more convenient Copaxone now in place, Teva is unlikely to see much in the way of lost sales or switching to generic formulations.
Valued at only 6.6 times next year's EPS consensus on Wall Street and sporting a 2.8% dividend yield, Teva was just too cheap for me to pass up.
The one exception to the rule among my latest buys is NXP Semiconductors (NXPI 1.92%), which is considerably closer to a 52-week high than 52-week low. The reason NXP got my attention relates to Qualcomm's (QCOM 1.09%) buyout of the company and NXP's improving long-term business fundamentals.
NXP Semiconductors presents an intriguing arbitrage opportunity in that Qualcomm has agreed to purchase NXP for $110 a share in cash. However, NXP Semiconductor is only trading at $97.80 at the moment, which is a reflection of the uncertainty surrounding whether or not the deal will actually go through. Qualcomm and NXP will need multiple regulatory approvals before the deal is finalized, and the big concern revolves around whether or not the combined company will have too much control over the automotive-chip market.
However, if the deal goes through (and to be clear, I personally expect it to), investors would net a 12.5% return based on the $110 per share cash price. What's more, with the deal not expected to close until late 2017, it's possible my shares could hit long-term holding status (366 or more days held), thus pushing into the lower long-term capital gains tax rate.
But even if the deal doesn't go through, NXP Semiconductors looks primed for success. Its acquisition of Freescale Semiconductor provides cost synergies that should improve margins, while the combined company becomes a leader in mobile payment-based semiconductor solutions, automotive semiconductor solutions, and general purpose microcontroller products. In short, it should have better pricing power as a result of combining with Freescale.
Expectations for the growth behind the Internet of Things are enormous, thus hanging onto NXP over the long run, should its deal with Qualcomm fall through, would allow to me to take part in that growth. The company's sub-one PEG ratio was the final straw that pushed me off the fence and into owning NXP Semiconductor stock.
Offshore contract driller Noble Corporation (NEBLQ) also enticed me to take a position, with its share price down more than 80% over the past three years.
The knock against Noble is clear as day: the falling price of crude oil. Offshore drilling is costlier than drilling on land, meaning Noble and its peers need a strong crude price to entice drillers to contract them. With oil dipping to a better than decade low in February, Noble has dealt with contract terminations and a shrinking backlog. Looking ahead, its once hefty profits are now expected to be losses.
There's little denying that Noble's bound to deal with some hiccups as crude oil prices look for an equilibrium, but I found plenty to like as well. In particular, Noble has one of the youngest fleets relative to its peers. Newer rigs typically are more efficient, have less downtime for repairs, and they command better dayrates. While its peers struggle to jettison older rigs, Noble and its jackups look poised to benefit from what I anticipate is an eventual rise in crude oil prices.
I believe the market has also overstated the debt concerns that Noble is facing. A majority of Noble's debt isn't due until 2025 or after. Meanwhile, if we ignore the company's near-term losses and focus solely on its cash flow, we'd see that Noble is on track to produce well over $1 in cash flow per share through 2019. This would imply that Noble shouldn't have any issue servicing its remaining debt, and presumably crude oil prices will have found a floor by then.
Considering that Noble has reduced its capital expenditures by about 80% in five years and remains cash flow positive, I believe I'm getting a great deal here.