Sometimes the stocks that investors hold in their retirement savings accounts get beaten down for no good reason. With that in mind, we asked our Motley Fool contributors which retirement stocks they think Wall Street is wrong about. Here's what they had to say.
Dan Dzombak
One retirement stock Wall Street is wrong about is IBM (IBM 1.44%).
IBM stock took a hit in October when the company reported third-quarter earnings of $3.68 per share, missing analyst estimates of $4.32, and lowered its forecast of achieving $20 per share in earnings for 2015.
IBM had based that goal on a target of $20 billion in revenue growth by 2014, combined with a reduction in outstanding shares through buybacks. IBM spent nearly $30 billion on buybacks, reducing shares from 1.16 billion to just under a billion today. However, the revenue growth did not materialize. Instead, IBM's revenue has dropped $9 billion since 2011. So what's there to like?
For one, the revenue drop is nowhere near as bad as it looks. IBM divested three businesses in 2014, selling its customer care outsourcing business to Synnex, its x86 server business to Lenovo, and its semiconductor manufacturing business to Global Foundries. If you adjust for IBM's divestitures, revenue growth was only down 2% instead of the alarming 12% figure being touted everywhere. The businesses that IBM kept are its recurring-revenue services businesses, where IBM is a global leader -- and these businesses have been doing well.
Second, the drop in IBM's share price means the stock is a bargain no matter how you look at it, with a trailing P/E of 13.8, a forward P/E of 10, and an EV/EBITDA of 8. That's a large discount to the S&P 500's (^GSPC +1.46%) P/E ratio of 19.9.
Third, with both strong businesses and a low price, you can take some comfort in the fact that Warren Buffett continues to take advantage of the drop in IBM's stock price. IBM is one of the Oracle of Omaha's "big four" investments, which also include Wells-Fargo, Coca-Cola, and American Express. Buffett bought nearly $800 million worth of IBM stock in the fourth quarter and likely is still adding to that position, though we won't find out about first-quarter purchases for another few weeks.
Last but not least, you get to collect a 2.7% dividend while you wait for Wall Street to change its opinion about IBM.
Dan Caplinger
Whenever you're dealing with an iconic company, it's easy to miss innovative changes that are transforming the nature of the business. That's what's happening at Coca-Cola (KO +0.96%). Bearish investors are focusing on the fact that the company's namesake carbonated soft-drink business has been under severe pressure lately. As health-conscious consumers across the globe move away from sugary beverages to fight obesity and encourage a healthier lifestyle, Coca-Cola has had to adapt, with its waters and still drinks helping to pick up the slack from sluggish sales of Coke, Sprite, and other well-known brands.
Yet what many people ignore about Coca-Cola are its investments in new avenues for growth. Between partnerships with Monster Beverage and Keurig Green Mountain, Coca-Cola is tapping into the energy-drink craze more directly with an established leader in the space, and at the same time it's looking to improve its distribution network by getting directly into households through home drink makers. By making the most of the assets it has spent decades developing, including its incredibly valuable global distribution network, Coca-Cola can overcome the decline in soft-drink sales and find new avenues for growth. In the long run, that should get Coca-Cola out of its share-price rut.
Asit Sharma
Investing for income and moderate growth -- as most retirees do -- can present surprising challenges. Sometimes, after buying a "safe" stock with a storied history and an attractive dividend, you find yourself an owner of a fading business that can no longer compete effectively within its industry.
Certainly shareholders have cause to feel uncertain about holding McDonald's (MCD 0.38%) stock, besieged as the company is by the rise of fast-casual restaurants, as well as an increasingly indifferent core customer.
Yet while Wall Street seems to have already passed a verdict that McDonald's is withering on the vine, the company has a forceful internal change agent that will keep pushing it to overcome its current woes: its franchisees. Roughly 80% of McDonald's locations are franchised, and in the U.S., franchise owners tend to be a vocal crowd: They were one of the crucial stakeholder groups whose displeasure caused the recent ouster of former CEO Donald Thompson.
U.S. franchisees measure the larger company's success not by plans presented to analysts but by their own monthly cash flow. And new CEO Steve Easterbrook certainly understands that the company's strategies of menu simplification, customization, and digital ordering will have to be executed swiftly to increase both systemwide sales and the cash flowing into franchisees' pockets. Easterbrook brings impressive marketing skills to the executive office, which should help to lure back formerly loyal customers. But the franchisee base will keep the new CEO in urgency mode, and though it might not be overnight, expect an eventual turnaround of the fortunes of the world's largest fast-food operation.
