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- Don D., California
Stock Screen: Conservative Stocks - September 30, 2011
In Homer’s epic poem The Odyssey, the main character, Odysseus, has the sailors manning his boat and plugging their ears as they sail by the sirens. The sirens were a mythical collection of creatures that sang to passing ships, enchanting those onboard, and luring them to their deaths as they steered their ships into nearby rocks. The wax Odysseus’ men placed in their ears allowed them to keep sailing and avoid the so-called siren song that drew the unsuspecting onto the rocks. Odysseus, meanwhile, had himself strapped to the mast of the ship so that he could hear the song, but not act on it.
A good stock story or a fast moving share price often have the same effect on investors as the mythical siren song had on sailors. Although everyone would like to believe that willpower is enough to avoid the siren song of alluring stocks, the truth is that focusing on safer investment fare is often difficult—especially in a world driven by immediate news. One way to avoid being drawn onto the investing shoals by “the next hot stock” (that turns out to be anything but) is to focus one’s attention on conservative fare and simply “plug your ears” so that more exciting, and often more risky, stocks aren’t even a consideration.
Value Line offers a number of proprietary measures to help investors identify such conservative stocks, the most notable being the Safety Rank. This measure is computed by averaging a stock’s Price Stability score and its Financial Strength Rating. Safety ranks range from 1 (Highest) to 5 (Lowest) and are distributed roughly in a bell curve, with the largest number of stocks scoring 3 (Average) and smaller number at the extremes. Obviously, selecting stocks that score 1 or 2 (the best possible scores) would help investors avoid riskier fare.
Value Line provides screens each week, published in the Index section of The Value Line Investment Survey, that cull out stocks earning the best Safety Rank and the second best Safety Rank (presented as two separate screens). This alleviates the need to rummage through on a stock-by-stock basis, trying to find the most conservative fare. Some interesting stocks that recently made these elite lists include Berkshire Hathaway (BRK/B), GlaxoSmithKline (GSK), and Hormel Foods (HRL).
Berkshire Hathaway is a publicly owned conglomerate holding company. Berkshire’s portfolio of companies is vast and highly diversified. It competes in dozens of markets including energy, railroad (Burlington Northern Santa Fe), paint (Benjamin Moore), diamonds (Helzberg) confections, tools, prepared foods and deserts (Dairy Queen) manufactured homes, recreational vehicles, carpet, shoes, etc. The 72-year old investment institution’s bread and butter is its property and casualty insurance operations, which cover the direct and reinsurance levels through GEICO, General Re, and Berkshire Reinsurance.
The company’s largest businesses continue to do well despite the challenging economy. GEICO is displaying robust demand for its automobile insurance policies, owing largely to its ability to out price the competition. In addition, its huge advertising budget and resulting well-received, often humorous TV spots are helping to boost its domestic market share. Furthermore, retention rates are improving, thanks to the competitive pricing, and its highly regarded customer service.
There are a number of growth initiatives in place at Berkshire. For instance, it just made a $5 billion investment in the troubled Bank of America (BAC – Free Bank of America Stock Report), similar to the highly profitable cash infusion provided to Goldman Sachs (GS) during the 2007-2009 downturn. It also recently completed the acquisition of Lubrizol, a leading producer of chemicals for the pharmaceutical and transportation sectors.
Berkshire stock has performed in line with the market for most of the recent slump, but has gotten a boost lately due to the announcement of the first share repurchase authorization in four decades. CEO, Warren E. Buffett confirmed that Berkshire bought $4 billion worth of its stock in the third quarter. The company’s confidence in itself is encouraging and signals that the stock may be undervalued. Notably, shares can only be repurchased when the price is less than 110% of book value.
Recent Berkshire hiring activity suggests Mr. Buffett, a.k.a “The Oracle of Omaha”, is grooming successors to take control of his empire. We trust that responsibilities will be placed in safe hands, and view this equity as suitable for long-term investors, partly thanks to its top Safety rank and a high score for Price Stability.
GlaxoSmithKline, along with its subsidiaries, develops, manufactures, and markets several over-the-counter drugs for a number of health-related issues that range from HIV to respiratory issues. Major commercialized drugs include Wellbutrin, Imigram/miltrex (central nervous system), Advair, Flovent/Ventolin (respiratory) and Augmentin (antivirals). In addition, the company manufactures a slew of consumer-related products such as Aquafresh toothpaste, Horlicks, a malted milk-based drink, and Lucozade, an energy drink. The company is based in the United Kingdom.
GlaxoSmithKlein shares are highly conservative, as evidenced by its stellar Safety rank. The diversified product portfolio and geographic presence ought to facilitate top- and bottom-line expansion for the foreseeable future. Our optimistic outlook is further exacerbated by an impressive drug pipeline.
Hormel Foods produces and markets several meat and food products throughout the United States. Its goods are delivered fresh, frozen, cured, smoked, and canned. The range of meat products is diverse, spanning from sausages and hams to bacon and poultry. Hormel also offers nutritional foods, salad dressings, desserts and drink mixes. More well-known brands include SPAM, Dinty Moore and Hormel Always Tender.
The operating landscape for this food processor seems quite favorable at present. Margins are benefiting from increased pork processing activity which is responsible for more than half of the top-line. Currently, hog prices are high due to speculation over greater U.S. demand. This is pressuring Hormel’s input costs, but it is finding success passing that expense onto consumers through elevated prices. The company’s expanding food portfolio —especially items offering good value— and focus on acquisitions should support growth. These high-quality shares offer conservative investors low volatility, as well as predictable, stable earnings growth.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.