Every private portfolio needs to have at least some exposure to each sector (Agriculture to Telcom) and class of security (Growth to Value). In this article, I highlight 3 stocks that might fill in the missing piece of your portfolio.
Stable Blue-Chip: Procter & Gamble (NYSE:PG)
Although I am not always an advocate of large and stodgy ‘core’ holdings, for reasons ranging from their lack of mobility to their over coverage from analysts, I think now would be a great time to add a respectable blue-chip to your holdings.
The recent market run-up has largely occurred in the junkie, more debt ridden names, leaving high-quality companies such as Procter & Gamble behind the curve. While many low-quality names have taken off, reaching new 52 week highs, Procter & Gamble is still sitting pretty, much closer to its 52 week low. Most of the time 52-week ranges don’t tell you much on a stocks direction, but you can pretty much bank on it not falling below the yearly lows. Earlier this year when stocks hit their lows, investors were pricing in Armageddon. Now that we know the end of the world is very realistic, we can basically assign the 52-week low price the worst-case-scenario price.
So we know that PG is still near its lows at $52 ($44-$74 range). Now let’s take a brief look at its fundamentals.
- P/E: 12x
- Forward P/E: 13
- Dividend Yield: 3.3%
- Operating Margin: 20%
With shares historically cheap, a higher than average dividend yield (3.3% compared to five year average of 2.3%) and still high and improving margins, PG should withstand the recession well. With its diverse product line and respected brands, it’s no wonder Morningstar rates PG 5-Stars with a Wide-Moat rating. Procter & Gamble could be the perfect core holding to anchor your portfolio through troubled times and beyond.
Speculative Small-Cap: Myriad Pharmaceuticals (NASDAQ:MYRX)
Spun off by Myriad Genetics in June 2009, this company has seen its share of problems already. Spun off in the $7-$8 range, MYRX fell to below $4 in a matter of weeks; in fact, it still only trades at $4.42. The cause for the rapid selloff wasn’t because it was a bad investment, but because many funds were forced sellers. Myriad Genetics was a $4 billion company before it spun off Myriad Pharmaceuticals, which only has a market cap of $105 million. Many of the largest sellers of MYRX stock were the large institutional companies who either didn’t care about MYRX (because they wanted to own the parent company, not MYRX), or were forced sellers because MYRX was too small of a company. This has created a unique situation where small investors can actually take the upper hand.
The company has a cash hoard of over $180 million, almost twice their market cap. Combine that with zero outstanding debt, it MYRX looks even more interesting. The only bearish side to the company clearly isn’t on its balance sheet, but in its pipeline. Most of their drugs are in early phases of clinical trials, and will need huge amounts of cash until they get to market. Some of their drugs were prudently purchased from other companies, some extremely cheaply as the seller was going into bankruptcy. Although I am not an expert in the field of medicine, I believe if the trials go as planned, they should have a very profitable line of drugs. There cash hoard should provide them with a cushion of comfort, and especially with such a great balance sheet, they are an intriguing takeover target. Look for MYRX to outperform in the long-run, but keep a sharp eye on their drug trials, as this is the only caveat.
Value Mid-Cap: Safeway Inc (NYSE:SWY)
Although the term mid-cap may be a stretch for a company with a market cap of $8 billion, I don’t think that Safeway is a large enough company to accurately be described as a large-cap. A quick description of the company from their website:
Safeway operates the nation’s third-largest retail grocery chain with about 1,740 stores in the United States and Canada.
Being in the grocery market business, Safeway is used to running on razor thin margins as low as 4%. Their name-brand recognition and new focus on cutting costs and increasing efficiencies should battle this problem well. Especially when you add in the fact that Safeway invested millions in renovating their stores in late 2003. This not only gives them one of the best portfolios of high-quality stores, but also allows them to keep CapEx costs to the downside during the down economy.
Safeway is planning on using most of its earnings towards shareholder friendly actions, such as reducing debt from $5.5 billion to $2 billion over the next 7 years. The company has also been boosting margins through its highly successful store owned brands such as O Organics and Eating Right. If sold outside Safeway stores, analysts predict these brands alone could be worth anywhere from $3 billion to $5 billion
With a P/E of 9x and a dividend of over 2%, Safeway is undervalued historically. Throw in the fact that insiders have been buying recently, Safeway may just be the right choice for you.