The market is at all time highs, a full 8 years into a bull market. So, if you're starting to get nervous, you're not alone. Now might be the time to bring some conservatism to ones' portfolio. So, if you're on the hunt for stocks that won't keep you up at night, our contributors recommend Celgene Corp. (CELG), Walt Disney Co (DIS -0.53%), and Valero Energy (VLO -1.90%). Read on to find out why.
This growth story is airtight
George Budwell (Celgene): Although biopharmaceutical stocks are often top-notch growth vehicles, they are also fraught with risk due to the highly competitive nature of the business within which they operate. The point is that there simply aren't many biopharma companies that have a truly rock-solid competitive moat.
The blue-chip biotech Celgene, however, is one of the few rare exceptions. Celgene has consistently posted industry-leading levels of top-line growth over the last several years, thanks to the strong momentum of its core hematology franchise. The net sales of its gold-standard multiple myeloma medicine, Revlimid, for example, are forecast to rise by a healthy 17% this year to a whopping $8 billion.
Unlike many of its biotech peers, though, Celgene's flagship drug isn't about the fall off the proverbial patent cliff. While a handful of companies are attempting to chisel away at Revlimid's core patent portfolio, the drug ultimately shouldn't face a real threat from generics until 2024 in the EU and 2027 in the United States, when the last of its patents expire in those territories.
By then, the biotech's experimental immunomodulatory drug ozanimod -- which is being assessed as a first-in-class treatment for several high-value disease markets such as relapsing multiple sclerosis and ulcerative colitis -- should be more than ready to pick up the slack. After all, ozanimod's late-stage clinical program is going according to plan for the most part, with Celgene on track to file for its first regulatory approval by the end of this year.
Safer than the sum of its parts
Cory Renauer (Walt Disney): You'd be hard pressed to find anyone unfamiliar with this media giant's iconic characters, but you might not realize just how diversified it's become in recent years. It still relies heavily on ESPN, ABC, and other leading media networks, but a string of well-executed acquisitions have proven there's more than one way to boost the House of Mouse's clout.
In particular, the purchase of Marvel's bottomless catalog of superheroes, and the generation-bridging Star Wars franchise have helped filmmaking profits make the jump to light speed. In fiscal 2016, studio entertainment segment operating profit came in 74.5% higher than two years earlier, at $2.7 billion.
The magic doesn't stop at the box office. Disney practically wrote the book on how to squeeze every penny out of acquired intellectual property, and its theme parks and consumer segments have become stronger than ever as kids of all ages can't seem to get enough of its characters from the big screen. This has lowered the percentage of total operating profit generated by media networks from about 56.3% in fiscal 2014 to 49.3% in fiscal 2014, despite growth across the board over the two-year period.
Investors also sleep well knowing the action and adventure stops in the accounting department. Although Disney has made some high-profile acquisitions, it's also managed to increase its semiannual dividend payments for seven straight years. The recent yield of about 1.4% isn't huge, but a commitment to increasing shareholder value makes Disney far less likely to bite off more than it can chew in the years ahead.
An energy company that knows how to work the cycle
Chuck Saletta (Valero): Valero Energy is the world's largest independent refinery company. As a refiner, Valero makes its money off the "crack spread" -- the difference between what raw oil sells for and what finished products like gasoline sell for. That gives it the ability to profit whether oil prices are sky-high or dirt-cheap, though it does still face inventory risk if prices swing too quickly for it to sell through its materials or finished products.
Energy refining is a business where scale matters -- and being the biggest independent refiner, Valero certainly has sufficient scale to keep itself competitive. It does around $70 billion in business annually, though that revenue does swing with the price of oil and gas. Based on a discounted cash flow model, I recently estimated the company to be worth around $33.7 billion, slightly above its $29.8 billion market capitalization -- and less than half of its prior-year revenue.
Supporting that valuation estimate is $2.3 billion in profit and $4.8 billion in cash from operations over the past year. Valero shares a decent portion of those earnings with its owners, handing out nearly half of it in the form of dividends. And as is fitting for a company exposed to the volatility of the energy business, Valero keeps a solid balance sheet, with over $4 billion in cash and equivalents on hand and a debt-to-equity ratio of only 0.4.
It's hard to label anything in the energy sector as a truly "safe" stock. Thanks to its solid balance sheet, reasonable market valuation, and business model that's not overly dependent on the price of oil, however, Valero has the right combination to look worthy of owning right now.