Not every investor is after the next home run stock. In fact, plenty simply want to own companies that have stable operations and offer up predictable returns.
So which stocks do we think are a good choice for a conservative investor right now? We asked a team of Foolish investors and they picked Sherwin-Williams (SHW -1.78%), Costco (COST -0.32%), and Texas Roadhouse (TXRH 1.41%).
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Covering the globe with growth
Rich Duprey (Sherwin-Williams): Stocks that can weather good times and bad provide the kind of stability conservative investors seek. One company that best exemplifies this is paint and coverings producer Sherwin-Williams, whose stock has returned more than 18% annually for the past 15 years, which includes the period of the financial collapse and the subsequent bull market.
When we're in boom times, Sherwin-Williams benefits from commercial and industrial customers who expand and construct new buildings and thus need its product, while during hard times it benefits from customers choosing to spruce up what they have rather than buying new.
Following Sherwin-Williams' purchase of rival Valspar, it is now the world's largest paint and coverings specialist. Where Sherwin-Williams generated some 84% of its revenue from domestic markets prior to the merger, Valspar derived 46% of its $4.4 billion in annual revenue from international markets, mainly China, where it realizes 12% of its sales, and Australia, which accounts for another 7%. The rest of the world added almost another 27% to the total.
About 60% of all paint purchased in the U.S. is bought by professionals, and many of them choose to buy their paint at Sherwin-Williams' network of company-owned stores.
Sherwin-Williams also belongs to that rarified group of stocks known as Dividend Aristocrats: companies that have hiked their payouts year after year for at least 25 years. The paint specialist has raised its dividend every year since 1979 and will likely continue doing so well into the future, making it a stable stock conservative investors can be comfortable with.
Bulk up on Costco shares
Demitri Kalogeropoulos (Costco): Costco's operations are far less volatile than your average retailer -- because it isn't really a retailer. Sure, the warehouse giant moves $115 billion of products through its 570 stores each year. But its real business, from which it generates most of its profits, is selling membership subscriptions. Costco's annual fee income was $2.6 billion in its most recent fiscal year and accounted for 70% of operating income.
Those predictable subscription fees (the membership renewal rate was 90% in the U.S. last year) insulate the business from many of the consumer-driven swings that hurt rivals. Profits held steady in fiscal 2016, for example, even though sales growth stalled under the weight of slowing customer traffic and deflation in the grocery segment.
The defensive business model helps ensure that Costco's stock is hardly ever available at a discount price. That's true today, considering investors are paying 27 times earnings for Costco compared to a price-to-earnings ratio of 18 for Wal-Mart and 11 for Target. However, Costco's shares have become a bit cheaper, as the stock trailed the market through the first half of 2017. That could spell opportunity for conservative investors, especially since comparable-store sales growth is speeding back up following a rare slowdown in 2016.
This restaurant has found a winning formula
Brian Feroldi (Texas Roadhouse): You might scoff at my assertion that a growth stock like Texas Roadhouse is a good choice for a conservative investor, but hear me out. While the restaurant industry in general is volatile and known for being brutally competitive, Texas Roadhouse has been producing remarkably consistent results for years on end. To get a sense of what I mean, take a look at this chart that shows the company's revenue and profit growth since its IPO in 2004.
TXRH Revenue (TTM) data by YCharts.
While there are a few profit bumps here and there, the overall trend has been consistently up and to the right. That should excite investors who crave stability.
What's Texas Roadhouse's secret sauce that allows it to perform so well? First, the company generally opens its stores in small markets where the competition is lower. Second, Texas Roadhouse sells high-quality meats in a high-energy atmosphere, all for a value price (the average guest check is about $17). Finally, the company delegates all of its advertising and promotion activities to the individual store levels. That allows them to cater their marketing needs to the individual market and allows them to develop deep ties within their local communities.
These factors have allowed the company to build a loyal following of customers who are willing to visit the stores in good times and in bad. When combined with new store openings and steady same-store sales gains, Texas Roadhouse has produced double-digit earnings growth for years. In turn, its stock has handily outperformed.
Looking ahead, management's plan is to keep running this winning formula as it expands stateside and internationally. If it succeeds, the company should easily be able to put up double-digit profit growth from here. Throw in a 1.7% dividend yield that only consumes about half of its profits, and I think this is a growth stock that can appeal to even risk-averse investors.
