One shortcut to finding great stock ideas is to simply mimic the masters. That's why we Fools regularly scour through Securities and Exchange Commission filings to see what our favorite billionaire investors have been buying and selling as of late.
So which stocks have we uncovered that could be an ideal choice for an investor in their golden years? We posed that question to our team and they picked Johnson & Johnson (JNJ -1.15%), Advance Auto Parts (AAP -2.38%), and Kroger (KR -0.43%).
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If it's good enough for Buffett, it could be perfect for retirees
Sean Williams (Johnson & Johnson): Sometimes there's just no need to get fancy. Warren Buffett, arguably the greatest investor of our time for having built up a $75 billion net worth from a starting point of less than $10,000 in six decades, owns shares of healthcare conglomerate Johnson & Johnson, and perhaps retirees should, too.
Johnson & Johnson derives its long-term success from a number of factors. To begin with, medical care is mostly an inelastic business. We can't choose when we're going to get sick or what illness we'll contract, meaning J&J's moat of opportunity is often growing, not shrinking, thanks to a growing global population. From its high-margin pharmaceutical business to its consumer health products, a majority of J&J's products have substantial pricing power and steady demand in any economic environment. This focus on inelastic products also helps keep J&Js volatility lower than that of the broad-based S&P 500.
Furthermore, Johnson & Johnson's three primary operating segments each brings something critical to the table. Consumer health products may not offer much in the way of growth, but it has excellent pricing power and very predictable cash flow, which Wall Street can appreciate. Consumer health products also act as the face of this brand-name behemoth, providing a pathway to consumer engagement.
Meanwhile, medical devices provide a long-tail growth opportunity for an aging America that will likely need more hip, knee, and spinal treatments to maintain their quality of life. Finally, pharmaceuticals bring a margin boost and fast growth rate to the table in the near term.
J&J also has a lot of stability on its side. In more than 120 years since it was founded, the company has had just nine CEOs, and it's increased its annual dividend for 55 consecutive years. Additionally, J&J is one of just two remaining publicly traded companies to hold an AAA credit rating from Standard & Poor's, placing its credit rating higher than that of the U.S. government.
Long story short, J&J offers a superior yield, lower volatility than the broader market, and a balanced approach to growth in practically any economic environment. It's a great stock that billionaires have bought and one that retirees should consider buying.
Industry tailwinds
Daniel Miller (Advance Auto Parts): Looking at Steven Cohen's Point72 Asset Management fund, valued at nearly $18 billion, you'll find an interesting pick among its top five holdings: Advance Auto Parts. While the company won't be found on many investors' radar, it offers an intriguing mix of value and potential bottom-line growth thanks to potential cost synergies and industry tailwinds.
Currently, AAP trades at a modest 13 times forward earnings, per Morningstar.com earnings estimates, because the company felt margin pressure during 2016 as it continued to work through the General Parts acquisition and integration. That bottom-line pressure weighed on the company's stock price, but with that integration over, the AAP management team now has the ability to focus on optimizing its supply chain to drive cost synergies and margins higher.
U.S. Moving 12 Month Total Vehicle Miles Traveled data by YCharts.
While management focuses on shoring up the bottom line, the company's business and its investors stand to benefit from industry tailwinds such as increasing miles driven -- more wear and tear on vehicles increases demand for auto parts. In addition to more miles driven, the age of vehicles in the U.S. continues to climb and reached a record 11.6 years at the end of 2016. Furthermore, IHS Markit research shows that the oldest vehicles on the road are growing the fastest: Vehicles 16 years and older are expected to grow 30% from 62 million units to 81 million units in 2021.
Yes, AAP is poised to boost its margins in the near term and will benefit from long-term industry tailwinds, but it's not a foolproof investment. Investors will want to watch Amazon.com and its potential entry into the auto parts world -- if Amazon keeps its auto ambitions minimal, AAP is on the right track for retirees.
Joel Greenblatt isn't scared of the Amazon/Whole Foods deal
Brian Feroldi (Kroger): Joel Greenblatt -- the billionaire investing mind behind Gotham Asset Management and author of You Can Be a Stock Market Genius -- is well known for buying high-quality companies when they are trading on the cheap. That's why I was intrigued to see that Greenblatt recently opened up a position in the supermarket giant Kroger. The stock has had a dreadful 2017 on the back of sinking same-store sales, a guidance cut, and the news that Amazon would be acquiring Whole Foods Market for $13.7 billion. All of this gloom and doom has caused Kroger's stock to fall more than 31% since the start of the year.
So why is Greenblatt willing to open up a position in the face of all of these headwinds? My hunch is that he believes that investors are overreacting to the Amazon news, which is a viewpoint that I happen to agree with. My argument is that Kroger has successfully competed against other industry giants for decades, so the supersized competition is nothing new. After all, it is worth remembering that Wal-Mart Stores was supposed to lay waste to the grocery industry when it started opening supercenters in the late 1980s. While Wal-Mart has been phenomenally successful with its push into groceries, take a look for yourself what has happened to Kroger's revenue, EPS, and stock price in the years since Wal-Mart opened its first superstore opened in 1988.
KR Revenue (TTM) data by YCharts.
How can this be? The reason is that Kroger's stores provide shoppers a combination of convenience, value, selection, and quality. Those same attributes remain in place today, so I believe that the company is going to be a tough opponent for Amazon to square off against. What's more, Kroger generated more than $115 billion in total sales last year, so it certainly has enough scale to compete on price and still earn a healthy profit.
However, the market doesn't appear to share this same view, which is why shares are trading for less than 12 times forward earnings. That low valuation suggests that Wall Street is assuming that the company won't ever be able to grow its earnings again. History and Joel Greenblatt suggest otherwise, which is why right now could be a smart time to consider getting in.
