To determine the best stocks for new money, you need to know two things:
- How great is the company?
- What price is the market charging for that greatness?
The quality of a company is affected by management changes, competitive pressures, regulation, labor unrest, demographic shifts, etc., etc., etc. Yet, a great company -- like McDonald's
Price, on the other hand, can shift violently from month to month or even hour to hour.
Now I'm going to make an obvious statement: As a result of price movements, the list of the best stocks for new money changes constantly.
It may be obvious, but most investors don't really pay attention to it. Let me briefly explain what I mean and then I'll reveal the companies our analysts identified as the best stocks. Period.
Greatness isn't always a great idea
Investors sometimes get enamored by how great a company is -- and ignore the price. It's a mistake.
Imagine the house of your dreams. Would you pay $100,000 for it? How about $1 million? $10 million? It's the same dream house at every price point, but at some price point, you'll answer "No." Why? Because even your perfect house becomes a silly proposition at a high enough price.
You'll often hear investors extol the virtues of a company -- 20% a year growth! Steady earnings history! An amazing new product! -- as evidence the company is a bargain at any price. But a stock can be a great company and a terrible investment at the same time.
The first step to market domination
I can't stress enough how important price is to an investment's success, but I won't belabor the point: The first step to market domination is identifying great companies. The second step is buying them at great prices. That's how you beat the market. Period.
So what are some of the best companies out there? I asked a few of our top analysts, and here's what they said.
|
Analyst |
Favorite Stock |
Reason |
|---|---|---|
|
Matt Koppenheffer |
Visa |
A powerful network that allows for high margins without exposure to consumer defaults. |
|
Tim Beyers |
Netflix |
Underrated ability to provide value to its customers as its business model adapts to technology changes. |
|
Morgan Housel |
Costco |
A membership-fee model that allows Costco to vex the competition by slashing its prices to breakeven. |
|
Alex Dumortier, CFA |
S&P 500 ETF |
A diversified bet on America. |
|
Toby Shute |
Graco |
The industrial play gets shockingly consistent and shockingly high returns on equity. |
Are these the best stocks to buy now? Maybe -- if they meet your standards and are selling for an attractive price.
How do you determine an attractive price? The answer is calculating an intrinsic value, which is your best estimate of the true value of a company (as opposed to its stock price). There are many ways to do this. Using multiples on earnings, cash flows, or book values are common. Our market-beating Inside Value investing service prefers the more time-intensive, but more thorough, method of using a discounted cash flow model.
After doing their due diligence and calculating Costco's intrinsic value, the team recommended the company to its members back in August. Its stock has run up since then, but the team still admires Costco's business model and recommends buying new shares below $52 (shares currently trade around $59). I invite you to view all their recommendations (and their "buy-below" prices) free for 30 days. Click here to start. There's no obligation to subscribe.
Anand Chokkavelu owns shares of McDonald's. He would love to own shares of Visa at a more reasonable price. Costco, Coca-Cola, and Wal-Mart Stores are Motley Fool Inside Value selections. Costco and Netflix are Stock Advisor picks. Coca-Cola is an Income Investor choice. The Fool owns shares of Costco. The Motley Fool has a disclosure policy.
