Billionaire investors like Warren Buffett have shown that investing doesn't have to be fancy to work. Doing something as simple as buying and holding high-quality companies trading at a discount to their perceived future valuation can many times lead to a handsome return.
With this in mind, we asked three of our Foolish investors to suggest a high-quality company that's taken a recent dip that could be a perfect addition to long-term investors' portfolios. Rising to the top of the list were coal producer Alliance Resource Partners (ARLP 2.74%), logistics giant UPS (UPS 1.99%), and video game developer and publisher Activision Blizzard (ATVI 0.23%).
A rock-solid coal stock you can dig
Sean Williams (Alliance Resource Partners): Coal may not be anywhere near the top of investors' buy lists, but limited-partnership Alliance Resource Partners looks to be one solid stock that could be picked up on the cheap after a rough end to the second quarter.
The problems with the coal industry are well documented. Supply has been high for some time, which has weighed on the sales price for coal. Meanwhile, unbridled expansion left many coal companies mired in debt and unable to dig themselves out. All the while, the U.S. had pushed for more stringent air-quality standards, putting the future of coal in doubt, and alternative forms of energy, such as solar, have become more efficient and cheaper. It's no wonder we've witnessed some of Alliance Resource Partners' peers go belly up.
But Alliance Resource Partners is a completely different beast. To begin with, its balance sheet is in far better shape since its management team chose to expand production with fiscal prudence in mind. At the end of the first quarter, the company had $625 million in debt, or about $537 million in net debt. With its peers, we're often talking about net debt in the billions. Further, the company has generated $800 million operating cash flow, and $710 million in free cash flow, over the trailing 12-month period. Its debt really isn't a concern, which is great news for investors.
Alliance Resource Partners' business approach has also been a source of strength. The company has always focused on securing long-term production and price commitments from its customers. It has 35.5 million tons secured for price in 2017, as well as 19 million tons in 2018, 9.1 million tons in 2019, and 4.3 million tons in 2020. The more production it gets locked in ahead of time, the less exposure it faces to wholesale price fluctuations.
The coal industry may also be on the verge of a boost from President Trump. If the Trump administration does wind up relaxing emission standards for the coal industry, and we see a rebound in natural gas prices, coal could become an attractive energy source for electric utilities once again.
Finally, hanging onto a rock-solid limited partnership like Alliance Resource Partners means receiving a superior dividend. Based on the current quarterly distribution of $0.4375, investors are racking up a 9% annual yield, which alone could double your investment (assuming no dividend cuts) in less than nine years. Alliance Resource Partners' recent swoon looks like a perfect opportunity for long-term investors.
There's a package for you
Demitri Kalogeropoulos (UPS): Package delivery giant UPS is trailing the market by a wide margin this year. Meanwhile, the underlying business is performing just fine. Revenue ticked higher across each of its operating segments in the most recent quarter, leading to a healthy overall boost of 7.5%. Profit growth was a modest 4%, but would have been higher if not for an unusually large fuel surcharge.
UPS is playing an important role in speeding the consumer transition into online shopping. Surging e-commerce volume helped push sales higher in the U.S. last quarter even as a rate hike improved average prices. UPS also saw strong contributions from its international business and booming demand in the freight segment.
Spiking capital expenditures have Wall Street worried about UPS' profit outlook. For example, the company is spending aggressively to add 17 massive facilities to its U.S. delivery network this year. It also recently added Saturday pickup and delivery to 5 new major markets.
Investors with a long-term focus can see that cash outlay for what it really is: a down payment on future growth. By bulking up its capacity and employing cutting-edge technology including automation to boost efficiency, UPS is ensuring that its delivery infrastructure will be robust enough to pair increased convenience with higher processing volumes. A world-class network like that takes time -- and plenty of cash -- to build. But the potential payoff is huge given the rate at which consumers are abandoning shopping trips in favor of picking up packages right at their doorstep.
A gamer for the long-term
Daniel Miller (Activision Blizzard): Whether you're an avid gamer, an avid investor, or some combination of the two, you've probably heard of Activision Blizzard. The gaming company was formed in 2008 as a merger between one of the largest console video game publishers (Activision) and one of the largest PC video game publishers (Blizzard), and the stock has been on fire after a series of video game hits.
During the first-quarter, when the company obliterated expectations, its monthly active users (MAUs) hit 431 million across its collection of gaming franchises. In fact, the company has eight $1 billion-plus gaming franchises. Those franchises include Call of Duty, Destiny, World of Warcraft, Diablo, Overwatch and Starcraft, just to name a handful. Overwatch alone helped push Activision's results higher as it was the fastest ever game to reach 25 million players; the company's revenue grew more than 48% higher during the first-quarter to top $2 billion.
One reason Activision remains promising is its ability to engage gamers after the initial game sale, and it's still in the early innings of maximizing that potential with games such as Destiny that hardly tested in-game purchases for items. In game purchases as well as downloadable content and expansions help keep games fresh for much longer which increases player engagement and revenue generated -- a virtuous cycle.
The only downside of owning shares of Activision right now is that the company's shares trade at a price-to-earnings ratio of 42x. That's pricey because many investors are hopping on the gaming bandwagon, but if it goes on sale anytime soon it could be a great time to buy into the gaming scene that is surely here for the long-term.