As much attention as stocks and investing get on an everyday basis, there are loads of great companies that still manage to fly under-the-radar. Whether it's because they are a small fish in a big pond, a company without a lot of visibility for the average consumer, or because they provide services that few of us use, many of these low key stocks deserve a closer look.
So we asked three of our contributors to each highlight a stock that gets overlooked by everyday investors but should be on their radars. Here's why they think that toy-maker Hasbro (HAS +0.99%), ratings agency S&P Global (SPGI +2.79%), and W.W. Grainger (GWW +0.12%) are stocks investors should be on the lookout for.
Image source: Getty Iamges.
The toy maker with tight ties to Disney
Beth McKenna (Hasbro): A top stock many individual investors seem to be overlooking is Hasbro, the toy maker behind such iconic favorites as Nerf, Play-Doh, Monopoly, and Transformers, and newer hits, such as Pie Face. One primary reason is likely its size: Hasbro's market cap of $11.9 billion makes it a large cap stock, however, it's a small fry when it comes to more popular stocks across the market such as Disney ($170.8 billion) and Coca-Cola ($180.7 billion), also in the consumer goods realm, and Google parent Alphabet ($573.3 billion) and Microsoft ($490.2 billion) in technology.
Those of you who are thinking that Hasbro's long-term total returns relative to more popular stocks are probably a big reason why it flies under some investors' radars might be surprised to learn that Hasbro's return over the 10-year period, through Feb. 7, trumps those of all of the stocks of the companies listed above. Moreover, Hasbro's return crushes that of its prime competitor, Mattel, over this period.
Data by YCharts.
Hasbro should remain a top-performing stock. It has, arguably, the strongest internal brand line-up in the growing toy industry. Moreover, Hasbro has increasingly close ties to Disney -- and I can't think of a more powerful partner in which to help it sell its toys. Hasbro has licenses to make and market games and toys based upon several top Disney properties: Star Wars, Marvel, Disney Descendants, and Disney Princess and and Frozen. The company snatched the lucrative latter license from Mattel in 2016.
Hasbro continues to fire on all cylinders. It recently reported fourth-quarter and full-year 2016 results that trounced analysts' estimates, with year-over-year revenue growing 12.8% and adjusted earnings per share soaring 27.1% in 2016.
Excellent business at an average price
Jordan Wathen (S&P Global): S&P Global is an overlooked cash cow. The company's core businesses of software and intelligence services (which includes businesses like Global Market Intelligence and SNL Financial), and corporate debt ratings (S&P), each make up about 45% of revenue. These two businesses are wildly profitable. Its ratings business generated operating margin of 50% in 2016, while market intelligence generated an adjusted operating profit margin of 34%.
But incredibly, neither lead on margin. S&P Global's smallest business by revenue, S&P Dow Jones Indices, effectively earns a royalty on index funds and other index products. That line of business, which makes up about 10% of revenue, generated a ridiculous operating profit margin of 64%. In all, more than $1 trillion of investor assets can be found in an ETF or other index fund that tracks an S&P Global Index.
I believe its three major lines of business likely have a very long runway of high single-digit revenue and earnings growth, a reality that doesn't seem baked in to its average price-to-earnings multiple.
A behind-the-scenes business that cranks out huge returns
Tyler Crowe (W. W. Grainger): Companies that work behind the scenes in business get little attention from investors. The fact that they are not consumer facing means that they can easily be overlooked. One such company that gets overlooked is W.W. Grainger. The maintenance, repair, and operations equipment supplier has been cranking out high rates of return, steady dividend growth, and consistent share repurchases for decades, yet rarely is it discussed as one of those must-own kind of investments.
GWW Return on Equity (TTM) data by YCharts.
What also makes Grainger a compelling investment today is the large growth levels it can pull thanks to new sales channels. For years, Grainger's business mostly dealt with helping with the procurement process for medium-to-large sized businesses. These were the kinds of companies that were large enough to merit a customer support person on Grainger's end for sales. Now that the company is building out an online sales platform, it can provide better service to smaller businesses. This new sales channel is producing 35% annual revenue growth with 50% returns on invested capital.
The one knock on the stock is that it isn't exactly cheap. It currently trades at an enterprise value to EBITDA ratio of 12.6 times, which is on the high end of its 10 year historical valuation. Considering the high rates of return it has generated and its propensity to throw cash back to shareholders with dividend and buybacks, though, it's a quality stock that may be worth paying up for.
