No matter how you slice it, the data has unequivocally shown that buying high-quality stocks and holding them over the long term is your best strategy for building real wealth.
According to a J.P. Morgan Asset Management analysis released in 2016, an individual who bought and held the S&P 500 for a 20-year period between Jan. 3, 1995, and Dec. 31, 2014, would have raked in a 555% total return, or 9.9% per year. Considering that the stock market has historically returned about 7% annually, inclusive of dividend reinvestment, this is a pretty killer return. What's more, investors would have netted these gains despite the broad-based S&P 500 tumbling by roughly half during the dot-com bubble and by up to 57% during the Great Recession.
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Top stocks for your IRA
But what's a great retirement strategy without a little tax planning? That's where individual retirement accounts (IRA) come into play. There are two main types of IRA: traditional and Roth. A traditional IRA is open to anyone, regardless of income, and it may provide a current-year tax deduction based on the amount you contribute. Investments in a traditional IRA grow on a tax-deferred basis, with the accountholder paying federal tax upon withdrawal.
On the other hand, a Roth IRA is funded with after-tax dollars, which means its allure is that any investment gains are completely tax-free for life, assuming you make no unqualified early withdrawals. There are also income limitations on who can contribute to a Roth IRA.
However, the bigger point here is that these tax-advantaged IRAs provide the perfect incentive for investors to buy high-quality stocks and hang on to them for a long period of time. What stocks should they be looking to add? Let's have a quick look at three top stocks for your IRA this month.
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The Cheesecake Factory
All good things must come to an end. For the first time in 30 quarters, Cheesecake Factory (CAKE 0.60%) will be posting negative same-store sales comps in the upcoming second-quarter earnings release. The company cautioned that consumer spending habits simply aren't matching its expectations, and it lowered same-store sales guidance to a decline of about 1% from a prior forecast that had called for 1% to 2% same-store sales growth. Shares of Cheesecake Factory fell sharply on the news and are down 16% year to date.
While restaurants of all shapes and sizes have seemingly been hit by tighter consumer spending, lower foods costs (which make eating at home cheaper), and the desire for smaller portions, I suspect Cheesecake Factory has what it takes to buck this intermediate downtrend.
What allows Cheesecake Factory to stand out from its competitors is its massive menu and operating efficiency. Dining guests expect a higher-quality dining experience at Cheesecake Factory, and given that the company makes all of its own sauces and a number of its products from scratch, that's exactly what they get -- and it's why the consumer is often willing to pay a premium. More importantly, a Business Insider report in 2015 found that Cheesecake Factory restaurants use nearly 98% of the food they bring in, meaning very little goes to waste. It's a testament to management's efforts to boost efficiency within its restaurants by creating an almost manufacturing-like cook brigade.
Cheesecake Factory can also use its innovation to win consumers over and keep them loyal to the chain. The company is experimenting with lower-priced dishes at its flagship stores to appeal to a more cost-conscious consumer, and it's tinkering with the fast-casual concept to compete against other fast-casual chains that have possibly sapped its foot traffic.
Now valued at less than 16 times forward earnings and paying almost a 2% yield, Cheesecake Factory looks to be a sweet IRA idea this June.
Fluor
Another top stock that's been weaker in 2017, and which investors could pick up on the cheap, is construction, engineering, and consultation services company Fluor (FLR -5.67%).
Image source: Fluor.
The election of Donald Trump in November was widely viewed as a positive for Fluor, given Trump's plans to rebuild America's aging infrastructure. However, delays in passing healthcare reform and even a tax plan have meant that any chance of an infrastructure plan have been dashed until 2018. That has sucked some of the wind right out of Fluor's sails and sent its stock down 16% year to date to a fresh 52-week low.
However, this move to the downside appears to be favoring short-term dynamics. While 2017 EPS estimates were readjusted a bit, the odds that an infrastructure bill will pass under the Trump administration still seem high. Rebuilding America's aging infrastructure is something both Republicans and Democrats can agree on, and any sizable and lengthy bill should work in favor of Fluor, which relies on governments, among other sectors, to grow. Also, Fluor's focus on energy projects could make it a standout winner if Trump continues to promote domestic shale production and America's energy independence.
Fluor also has a healthy backlog of projects to fall back on. Even with a year-over-year drop of $4.4 billion, the company walked out of Q1 2017 with $41.6 billion in its backlog. Having such a large backlog takes the pressure off management when commodity cycles turn lower and capital spending doesn't go as planned. Nonetheless, the company has remained healthfully profitable, and its results should improve as U.S. GDP growth picks up.
With EPS expected to grow by roughly 20% between 2017 and 2018, and Fluor's backlog remaining healthy, it looks to be a top stock to consider for your IRA this June.
Merck
Lastly, Big Pharma Merck (MRK -0.58%) could be a nice addition to your IRA. Though shares of Merck have outperformed the S&P 500 year to date by 4 percentage points, there are reasons to believe this outperformance could grow wider over time.
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For years, Merck's biggest issue consisted of patent losses and how it would replace brand-name therapies being eaten alive by generic drugs. More recently, there have even been concerns that blockbuster type 2 diabetes drug Januvia would begin to struggle, given positive results in long-term cardiovascular studies for two competing next-generation therapies, Invokana and Jardiance. But those worries have abated thanks to Merck's cancer immunotherapy Keytruda.
According to a recently published report in the journal Science, Keytruda was tested in 86 patients with a specific genetic mutation who had advanced forms of pancreatic, prostate, uterus, and bone cancers that had progressed while they were on standard chemotherapy agents. The breakthrough immunotherapy led to a 77% objective response, which included 18 complete responses, with the remainder being partial responses or instances of stable disease. Keytruda recently became the first drug ever approved by the Food and Drug Administration for a genetic mutation regardless of cancer location. It could very well top $10 billion in peak annual sales when all is said and done.
Merck is also seeing benefits from its hepatitis C drug Zepatier. The company's aggressive pricing tactics -- Merck priced its drug at nearly $40,000 below the list price of Gilead Sciences' Harvoni -- appear to have paid off in added market share. Sales of Zepatier climbed to $378 million in the first quarter, putting it on track to potentially deliver $2 billion in peak annual sales for Merck.
As Keytruda ramps up and its label expands, it's not out of the question that Merck could generate $5 or more in full-year EPS by 2020. Given its relatively healthy pipeline and product portfolio, it could be worth a serious look for your IRA.
