Studying the macro picture as it evolved the past six quarters and considering the geopolitics and cultural dynamics it implies, my view is that this is a time for cautious buying. As hurricane Assad subsides into a tropical storm of insults, it seems that a major market correction the next 6 weeks is less likely though still possible. Foreign and domestic issues like jobs remain very uncertain. Even official numbers show an employment situation that is "quite dismal." The denouement may include significant re-structuring of socio-economic relationships and global business. That is the premise for this article.
There are some excellent companies positioned at diverse sweet spots in culture: they are good buys when fiscal policies and geopolitical action clarifies. Those who believe a correction will be minor or already is priced in could begin buying on dips. There should be plenty of those the next 6-8 weeks as the situations with QE, the debt ceiling and Syria resolve, even though any arrangements will be susceptible to shifts. As to QE, the expectation of tapering is partly priced in and Fed commitment to continued low rates could super-charge the markets and stave off a growing disaster in bond markets.
This article will examine some consumer discretionary, energy and PM (precious metals) low-debt and strong growth plays. In evaluating companies I look primarily at revenue to total debt, strong cash flow, revenue growth and, lastly, dividend / payout ratio. One finds great companies in the consumer space from giant to large to mid cap names.
Low-debt, strong revenue and cash flow consumer plays range from giant Wal-Mart (WMT) and Amazon (AMZN) to large caps like Starbucks (SBUX), TJX (TJX) and Whole Food Markets (WFM) to mid caps like Guess? Inc (GES) and Dunkin' Brands (DNKN). These are great companies, as is Target (TGT) by the metrics except for slow revenue growth. Home Depot (HD) and Johnson & Johnson (JNJ) also are strong though the former is more vulnerable to reversals resulting from sustained housing and economic distress which official numbers disguise. Since we are facing crises and volatility, I look more to strong revenue and low debt for staying power and future growth.
Many would place AMZN first among excellent choices. Its cash and equivalents alone are 2.4x debt and its immense revenues are 22x debt. Along with SBUX and TJX it is one of the most profitable companies in the market and has an immense and expanding customer base. Moreover, AMZN is growing revenues at 22.1% and vendors and customers alike turn to it for everything. A pure growth play that pays no dividend, AMZN is up 20% YTD. At $135.2 billion, it is a mega-cap that can weather storms. Among the four companies, AMZN, DNKN, WFM and SBUX growing revenue in double digits, Amazon is tops, a great feat given its size.
SBUX is one of the great successes in the consumer service sector, indeed in the markets. It is growing revenues at 11.7% and its $2.32 billion cash flow alone is 4x total debts: revenues are 26x debts. It yields 1.2% on a moderate 38% payout and $2.10 EPS. At the Starbucks in the Boston University bookstore recently, I saw tanned students sipping over-priced coffee while massaging touch-screen phone-cameras and tapping on their Macs. SBUX is up nearly 60% since October 2012.
Across Beacon Street was a DNKN outlet in which I was the only person whose native tongue is English. The coffee was much better than at SBUX and little more than a third the price, the crullers and bagels very good, and also less expensive. These are the two America's of the future. DNKN is growing revenues at 14%, the main reason it is listed here, and has $1.17 EPS. Its debt/equity is a painful 5.17 that fuels its rapid expansion. It is the future for an increasing proportion of Americans for fast food and drink. It features a large, ever-expanding array of sandwiches, snacks and seasonally-themed coffees to bring in and retain new customers.
WFM and GES stand out for their zero debt. This means crises may batter the share price but their recovery should be strong and sustainable. This is true particularly for food-based WFM which achieves $13 billion revenues and 13.1% revenue growth on zero debt. GES is the only company noted here that has negative (-2.2%) growth and it might consider reducing its 2.6% yield to bring down a leveraged payout ratio over 100%. But its zero debt and brand name appeal make it worth watching. It rose 40% in the four months from April 2 - August 2 and then lost half those gains in August before a recent rebound. Over two years, however, it does not show the strong profile of TJX.
TJX has expanded its overseas and online platforms and like SBUX remains one of the best issues in the consumer space. It has a $38.5 billion market cap, 7.6% growth, its $2.6 billion cash flow is twice its debt and its revenues are 22x debt. TJX has sustained growth as impressively as any large cap: in six months it has gained 22%, since the Nov. 15, 2012 trough it is up 37% and over three years has risen 66% in a notably steady up-trend. Barring a radical change in cultural structure, TJX merits a place in every portfolio.
WMT shows a strikingly similar profitability profile to energy giant British Petroleum (BP), which also is a great long-term holding. WMT has $26.4 billion cash flow that is half its debt and its revenues are 9x debt. It yields 2.6% on a moderate 34% payout. It was powerful YTD till May 22 taper talk. Amid general market unease, it since has been a roller-coaster but it has $5.15 EPS to go with its great revenue/debt and cash flow.
HD has strong 6:1 revenue / debt and a cash flow half total debt. Its $3.38 EPS supports a 2.1% yield on 40% payout. However it will suffer unless QE continues as the housing market already is feeling "rate shock" that "could go another month or two" says Doug Duncan, economist of Fannie Mae. Bank of America (BAC) is cutting 2k jobs because of slowing mortgage applications. So the top four in Consumer Discretionary are AMZN, SBUX, TJX and WFM covering health food, high-end fast food, apparel and wholesale.
The energy sector may surge soon and two companies have great metrics and the size to weather storms. Already noted, BP has revenues 8.3x debt and 6.6% growth, impressive for a behemoth. EPS are a strong $8.10 on a massive $39 billion cash flow. It yields 5.2% on a modest 26% payout. If you wish to avoid possible hits from law suits (in my view a small matter), choose Chevron (CVX), an American peer with an even more impressive 11.4 revenues / debt and a massive $38 billion cash flow that is 1.8 x debts. EPS is huge at $12.34 and CVX yields 3.3% on a 30% payout. The one measure on which it currently lags is revenue growth, showing -7.9%. This should amend and it is less than half as bad as Exxon's (XOM) negative 14.3% growth. All in all, BP is chief in this sector. It is a top holding in Vanguard's Energy (VDE) and Europe (VGK) ETFs.
Given the macro context, one might look at General Dynamics (GD) whose $31 billion revenues are 8x debt and whose cash & equivalents cover the debt. Its growth though is slightly negative and I prefer United Tech (UTX) with 15.9% revenue growth, revenues at 3x debt and a 2.1% yield on 39% payout.
The best (low debt, growing revenues) PMs are going to survive and thrive. This is especially true for silver given growing tech-industrial uses. In selecting companies, look for multiple producing sites and experienced metallurgical geologists and miners on the board. With these postulates, First Majestic (AG), Endeavour (EXK) and Fortuna (FSM) are the best in silver and Eldorado Gold (EGO) and McEwen Mining (MUX) in the gold space. I will treat these more fully in a future piece noting here only that juniors FSM and MUX are debt free and mid-tiers AG, EXK and EGO nearly so. September 3, 6 and 9 showed the low 'r' hedge value of PMs. On a weak day for the sector, MUX was even and it added as VP an experienced geologist who specializes in E & D and mining of small cap PM companies.
AG has revenues 12x debt at its five growing sites; EXK has revenues 6x debt at its three sites. Mid-cap EGO shows revenues 2x debt at its multiple world wide sites. Gold and energy royalty company Franco Nevada (FNV) also has zero debt. All have recovered strongly from the June 26 lows and even more since August 5, albeit with the volatility that typifies the sector. Given that volatility, one could trim holdings after the next uptick and buy back below your cost basis. As currencies weaken and fail as in India, Brazil, Japan and, heaven help us, here, profitable gold and silver producers will thrive and bullion prices rise. Capital managers as diverse as Robert Fitzwilson, John Hathaway and Dr. Stephen Leeb believe they will rise substantially.
Things will be difficult in the mid and long term or I would be even more positive about the companies noted here. In the short term, the major energy producers should do best. If Syria calms down and yields remain low, the best consumer discretionary companies will repay investors nicely. Vanguard's ETF (VCR), +25.2% YTD includes AMZN, SBUX and HD in its top nine holdings. TJX is its 14th largest holding and VCR also is heavy in the media-entertainment industry which should out perform going forward. Buy big media, Fox (FOX), CBS (CBS), Time Warner (TWX) and NBC (CMCSA) on dips.
Note too that commodities I have mentioned as value, growth and low 'r' plays, coal (KOL), natural gas (GAZ), uranium (URA) and agri-nutrients (SOIL) rose strongly Monday, from +2.5% to 3.95%. China's recovery will help boost these under-valued issues and help anchor your portfolio.