Betting on boring stocks pays off

By Ben Rooney @CNNMoneyInvest March 8, 2013: 7:51 AM ET
http://money.cnn.com/2013/03/07/investing/

Investors have become enamored with stocks that offer healthy dividends and are less volatile.

NEW YORK (CNNMoney)

With the Dow at a record high, the market mojo seems strong.

Yet, the stocks leading the way higher are, for lack of a better word, boring.

The best performing blue chip this year is Hewlett-Packard (HPQ, Fortune 500), which has surged 47%. That's a bit of a head scratcher, considering the PC market is in a deep slump and HP is expected to report a drop in profits this year. (See correction below.) The phrase "dead cat bounce" comes to mind.

HP aside, the other top gainers have been consumer staples, such as Procter & Gamble (PG, Fortune 500) and Coca-Cola (KO, Fortune 500), as well as diversified manufactures like 3M (MMM, Fortune 500) and General Electric (GE, Fortune 500). Home Depot (HD, Fortune 500) has also rallied as the housing market continues to rebound.

In other words, investors are most excited about companies that make and sell things like toothpaste, scotch tape, light bulbs and vinyl siding.

"Investors are looking for stocks that are steady," said J.J. Kinahan, chief derivatives strategist at TD Ameritrade. "These are stocks where you know what you're getting into when you invest in them."

The main laggards, meanwhile, are stocks that tend to do well when growth is strong in emerging economies, such as China. Aluminum producer Alcoa (AA, Fortune 500) and Caterpillar (CAT, Fortune 500), which makes construction equipment, have both underperformed this year.

Apple (AAPL, Fortune 500) is perhaps the best example of how yesterday's darlings have fallen out of favor. Once viewed as a company that could do no wrong, Apple's stock has lost more than a third of its value, after hitting an all-time high last year.

"Investors are looking for bond substitutes," said Jack Ablin, chief investment officer at BMO Private Bank. "In general, boring stocks don't lead the market higher."

Ablin said investors have been "coerced" into stocks by record low interest rates. As a result, they have gravitated toward stocks that have bond-like qualities, offering low volatility and healthy dividends.

For example, Johnson & Johnson (JNJ, Fortune 500) currently offers a dividend yield of 3.16% and its stock is up 10% this year. By contrast, the yield on the 10-year Treasury note has struggled to break above 2%.

"The companies that are leading nowadays are defensive," said Ablin. "These are stocks that are held by nervous investors, not bullish ones."

That may be true but Kinahan thinks investors' focus on consumer staples and housing signals a vote of confidence in the economy.

"As consumers start to feel more confident about their jobs, they will start to invest more in their homes and electronics," he said.

In addition, the cautious approach to stocks suggests the rally is sustainable since investors have not yet fully committed to the market, said Kinahan.

At the same time, many of the stocks that have rallied this year were also due for a rebound.

"These stocks have been beaten up a bit in the past, let's be honest," said Kinahan.

Correction: An earlier version of this article incorrectly said that HP was expected to report a loss this year.  

First Published: March 7, 2013: 11:15 AM ET

By Ben Rooney @CNNMoneyInvest March 8, 2013: 7:51 AM ET

http://money.cnn.com/2013/03/07/investing/

2 Stocks That Are Wasting Your Money

By Rich Smith
April 12, 2012
Article from The Motley Fools

According to Boston University finance professor Allen Michel, when a company announces it's buying back stock, that stock tends to outperform the market by 2% to 4% more than it otherwise would have over the ensuing six months.

But over the long term, multiple studies show that buybacks actually destroy shareholder value. CNBC pundit Jim Cramer cites the example of big banks that bought back shares in 2007-2008 -- just before their stocks fell off a cliff. Far from buy signals, Cramer calls buybacks "a false sign of health ... and often a waste of shareholders' money." Indeed, the Financial Times recently warned: "the implied returns over a period from buy-backs by big companies would have been laughed out of the boardroom if they had been proposed for investment in ... conventional projects."

So why run buybacks at all? According to FT, management can use them to goose per-share earnings, which helps CEOs earn bonuses based on "performance." Also, the investment banks that run buybacks earn income and fees from promoting them. But you and me? Unless the purchase price is less than the shares' intrinsic value, we miss out.

And we're about to miss out again.

Two bad buybacks

StreetInsider.com keeps a running tally of which companies are buying back stock, and how much they're spending. SI is too polite to accuse companies of wasting shareholders' money, of course -- but I'm not. With SI's help, I've uncovered two examples of popular stocks that I believe are squandering shareholder dollars on ill-timed buybacks... and one stock that isn't.

American Capital (Nasdaq: ACAS  ) 

Three months ago, I criticized American Capital's decision to repurchase 8.4 million shares of stock, even as I admitted that at just 3.8 times annual earnings, the shares looked anything but expensive. With revenues on the decline, AmCap had been forced to cancel its dividend, and as I argued at the time: "this company ... can't afford to pay dividends right now. [So why was it] spending nearly $60 million buying back its dead-in-the-water shares?"

Ordinarily, you'd expect buying activity to support the stock, as management stepped in to buy anytime share prices dropped. So how has that worked out? Well, over the past three months, AmCap shares are up 5%. That sounds good, but it only paces the performance of the S&P 500, also up 5%. Worse, we recently learned that AmCap bought another 5.5 million shares in Q1 2012. Unfortunately, the prices it paid averaged $8.79 per share -- more than 4% above today's going rate.

If at first you don't succeed, fail, fail again.

Goldman Sachs (NYSE: GS  ) 

And speaking of failures, let's turn to Goldman Sachs. The most (in)famous banker of the 2000s is getting pilloried today in the pages of The Wall Street Journal for letting Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) outfox it on a bond trade involving debt of struggling newspaper company Lee Enterprises. But that's not the only reason to doubt the stock's prospects.

In a cryptic note, Goldman confirmed last month that after the most recent round of bank stress tests, it now has a green light from the Federal Reserve to proceed with a planned "repurchase of outstanding common stock" of unspecified size. Depending on the size, this could be a disaster of either minor or major proportions for its shareholders. Consider: At $119, Goldman shares currently fetch the princely valuation of more than 26 times earnings, while rival bankers Morgan Stanley and JPMorgan cost less than 15 and 10 times earnings, respectively. Yet according to analysts who follow the stock, the fastest Goldman can hope to grow its earnings long term is about 15% per year. The resulting PEG ratio of nearly 1.8 suggests Goldman is overpaying for its shares.

Don't make the same mistake yourself.

Apple (Nasdaq: AAPL  ) 

Now, I don't like to end this column on a down note, and fortunately, I have spotted one company out there that may do better by its shareholders: Apple. Perhaps you've heard of it?

Last month, it was Apple's initiation of a $2.65 per share dividend that got all the headlines. Less noticed, though, was the i-everything company's announcement that it will also buy back $10 billion worth of stock, beginning on Sept. 30. At first glance, I have to say I like the idea. Priced at less than 18 times earnings (and an even more attractive ratio to free cash flow) and growing at 20% per year, Apple shares look priced to move. My one concern here (I have others elsewhere) is Apple's acknowledgement that a prime objective of its buyback plan is to "neutralize" the effects of future stock dilution from employee equity grants. To the extent Apple uses its buyback authorization to buy undervalued shares and benefit outside shareholders, I like the deal.

But to the extent that Apple spends $10 billion to mask the effects of stock dilution, I don't.

Fool contributor Rich Smith does not own (or short) shares of any company named above. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of JPMorgan Chase, Apple, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Goldman Sachs, and Apple, as well as creating a bull call spread position in Apple. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Article from The Motley Fools