Some investors like to take a lot of risks. Others are more conservative. If you're a conservative investor, you're likely looking for businesses in steady industries that are either highly diversified or have minimal competition.
This type of company is rare to find, but if you do, and the stock is trading at a reasonable valuation, then it can be a great addition to anyone's portfolio. InterActiveCorp (IAC), Alphabet (GOOG 0.74%) (GOOGL 0.55%), and Lockheed Martin (LMT -0.20%) are three low-risk stocks for conservative investors. Here's why.
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1. InterActiveCorp (IAC)
IAC is a long-running conglomerate of internet-based businesses. Started in the 1990s by chairman Barry Diller and now run by his protege Joey Levin, the holding company has operated under various names over the years and it owns dozens of different businesses, including large stakes in MGM Resorts and Angi Inc. (owner of Angie's List), plus a bunch of smaller wholly owned businesses.
Over the past 12 months, IAC has spun off two of its most successful businesses, Match Group and Vimeo. These companies were acquired years ago, incubated under the IAC umbrella, and are now worth billions of dollars, providing fantastic returns for longtime shareholders of IAC.
With IAC's current market cap of $12.6 billion, $5.2 billion can be attributed to its stake in Angi, $2.4 billion to its stake in MGM, and $2.8 billion to cash on its balance sheet. If you pull out the holdings from those three parts of the business, IAC's value comes down to $2.28 billion. This $2.28 billion in value is what investors are effectively buying a stake in when purchasing the stock as the rest of the stakes are managed somewhat outside the company. But that $2.28 billion stake managed to generate over $1.4 billion in revenue over the past 12 months and grew revenue by 40% in Q1.
With a diversified set of fast-growing businesses trading at reasonable valuations and a management team with a proven track record of success, IAC looks like a perfect stock for conservative investors.
2. Alphabet (Google)
Alphabet is the parent company of Google, but also owns other businesses like YouTube, Google Cloud, Waymo, and the mobile operating system Android. Over the past 12 months, the company generated a whopping $197 billion in sales, up 18% year over year. On top of that, Alphabet is highly profitable, generating over $73 billion in cash from operations and $51 billion in free cash flow over that same time period.
Its core business (Google search) is incredibly steady and has minimal competition, but it also has tons of high-growth subsidiaries. For example, video-platform YouTube grew sales 50% to $6 billion last quarter, and Google Cloud (a competitor of Amazon's Amazon Web Services and Microsoft's Azure) grew sales 47% to $4 billion in the same period.
At a market cap of $1.71 trillion, Alphabet is one of the largest businesses in the world and trades at a relatively high price-to-free-cash-flow ratio (P/FCF) of 33, based on its trailing-12-month financials. However, Alphabet has a steady and growing business in search, fast-growing subsidiaries like Google Cloud and YouTube, and plenty of other start-ups under its umbrella (like self-driving company Waymo). With over $100 billion in cash on its balance sheet to keep it insulated in troubled times and a diversified set of businesses with minimal competition, Alphabet is a safe bet for conservative investors, even at a relatively high valuation.
3. Lockheed Martin
Unlike Alphabet or IAC, Lockheed Martin is not diversified in the traditional sense in that it relies on one customer for most of its business. But that customer is one of the most reliable in the world: the U.S. government. The security and aerospace giant has long-term contracts with the U.S. Department of Defense that help it generate consistent sales and profits. And while it mainly has one giant customer, it sells dozens of different products and services to numerous government agencies that pull from different funding programs, offering it some diversification against the changing priorities of different administrations.
In Q1, sales for Lockheed hit $16.3 billion, up from $15.7 billion in the year-ago quarter. Its backlog (contracted services that have yet to be executed and yet to be paid for) stayed steady at $147 billion, which shows how much of its future sales are already locked in with its customers. Over the past 12 months, Lockheed generated $5.86 billion in free cash flow and should continue to generate steady amounts of cash for shareholders, with the high likelihood that it remains one of the government's top customers.
With all this cash, management consistently returns money to shareholders in the form of dividends and share repurchases. Its dividend yield currently sits at 2.74%, and its share count has gone down almost every year since 2002. Lockheed is far from a high-growth investment, but with its giant backlog and the amount of cash it returns to shareholders, it looks like a great fit for any conservative investor.
