As the market trades near all-time highs, posting the best January in over a decade, and responding to bullish corporate earnings, some retail investors are looking to dive back into the market. With the market trading higher, such movement could be a great opportunity for the average investor, but investors must also consider the possibility that the market could come crashing down. At this point, we are reaching uncharted territory and it's hard to know how the market may react. Therefore, I am looking at ways that investors can protect themselves.
Today I am looking at a very specific type of investment, high-yield secular stocks. The high yield will provide the investor with gains that are better than bonds or other low-risk investments. And because the high-yield stock is secular, the stock should trade relatively flat or less volatile because it's a company that performs balanced regardless of the economy. Furthermore, I want high-yield secular stocks that have performed well in recent months; this suggests that investors are buying as the market trades higher. As a result, if the market does continue to rally, these high-yield secular investments could very well continue to trade higher. With that being said, let's look at several stocks in this category. You can then decide if any of these investments fit into your portfolio.
Eli Lilly & Co. (LLY) is a diversified pharmaceutical company that operates in 130 countries. The stock has increased almost 40% in the last year and is trading at new 52-week highs. On Tuesday the company announced earnings that beat expectations and it also guided above the consensus for 2013 in both revenue and earnings. While most large pharmaceutical companies are feeling the effects of the patent cliff, Ely Lilly has weathered this storm quite nicely, and with very minimal declines. The company has operating margins of 21.96% over the last 12 months, returns 26.48% on its equity, and operating cash flow of $5.65 billion. Therefore, this is a solid company with few operational concerns. And considering that its products are a must-have, Ely Lilly should continue to be a good investment in both performance and dividend with its 3.70% yield.
The Procter & Gamble Company (PG) is another secular stock that has performed well in recent weeks, with a near 12% gain in the last month. It's a diversified company that is focused on providing consumer packaged goods in more than 180 countries. In 2013 P&G will pay a yield of 3% to its shareholders and repurchase $5 billion to $6 billion worth of shares, which could rise due to the company's growing business model. Last week the company announced earnings and showed that is company is growing in size and that gross margins continue to rise. The company significantly increased its guidance for the full-year which is a testament that global growth is in fact occurring. Therefore, as a high-yield super company that continues to buyback stock and is now guiding for growth in 2013, I think this is a safe stock that should provide protection against volatility.
ConAgra Foods, Inc. (CAG) is a food company that operates in two segments: Consumer Foods and Commercial Foods. The stock pays a yield of 3.06% and has returned gains of 32% in the last six months. What makes it a good secular investment is the fact that it operates in the foods space, and that food sales will always rise with an increase in global population. Now, ConAgra is much different than the others on this list. It is a secular company but just recently took a large risk to acquire Ralcorp; and as a result the S&P cut its rating to triple-B-minus, noting the large acquisition. However, this is a company that has seen four years of revenue growth, has institutional ownership of 70%, and trades 42% as volatile as the market. As a result, these factors make ConAgra a great investment in a market that could trend either way.
The Hershey Company (HSY) is a producer of chocolate and sugar confectionery products in 70 countries worldwide. The company's products might not sound secular, however chocolate is one of the most consumed products in the world and Hershey is the leader in the space. The stock pays a yield of 2.20%, has returned 26% over the last year, and has institutional ownership of almost 74%. The company is yet to announce earnings for the fourth quarter but guided higher after its third-quarter earnings report. The company is expecting an increase in sales volume of 2.1% for the last quarter, which would be consistent with other secular companies such as P&G and ConAgra. With the economy growing faster than the market had expected, Hershey might be a nice addition to your portfolio. It doesn't pay as good of a yield as the others on this list, yet it has maintained gains and is only 25% as volatile as the market, with a beta of 0.25. As a result, I consider this to be a fairly safe buy.
These are all companies that operate in different businesses but all share certain similarities. Each has traded higher, each is secular businesses, and each is growing faster than the market expected. This trend suggests that the market may be healthier than we expected, but we could still experience a pullback due to being in uncharted territories, and due to the market still not growing as fast as desired. Therefore, high-yield low beta secular stocks should provide some security, and at the least, should help balance your portfolio.
Disclosure: I am long LLY.