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Summary

  • This article revisits a previous article screening for low-beta stocks with a strong balance sheet.
  • Although the screen did not produce market beating results over the last year, it was a starting point for useful research.
  • This year's screen produced 12 stocks that may be interesting to investors looking for safe stocks.

On April 9, 2013, I published an article titled "Boring is good - safe stocks for a market downturn and beyond". In it, I talked about the alpha generation potential of low beta stocks and made some suggestions for further investigation. Although a year is not a particularly long time in investing terms, I thought it would be interesting to revisit the original article.

For those of you who do not remember every word I wrote a year ago (which is everyone, including me, I suspect), the screen criteria were as follows:

  • Market cap > $420M
  • Beta between -0.5 and +0.5
  • Dividend yield >2%
  • Total debt/equity <50%
  • 10 year EPS growth rate > 0.05%
  • Gross Margin >30%

The original article includes more rationale for each of these filters, but the general idea was to find safe companies. The table below shows the results for each of the companies in the original article and the major US indexes (sorted in order of return):

Symbol

Name

Purchase price

Current price

Dividends

Price Return

Total Return

SEP

Spectra Energy Partners

37.36

50.63

2.63

35.5%

42.6%

NASDAQ

3237.86

4368.04

0

34.9%

34.9%

RGR

Sturm Ruger & Company

48.12

60.31

2.75

25.3%

31.0%

SP 500

1568.61

1962.87

0

25.1%

25.1%

CPSI

Computer Programs & Systems

53.02

61.99

2.67

16.9%

22.0%

Dow Jones Industrial

14673.46

16947.08

0

15.5%

15.5%

CLX

Clorox

86.90

91.71

4.22

5.5%

10.4%

CHT

Chunghwa Telecom

31.05

31.82

1.78

2.5%

8.2%

PG

Procter & Gamble

78.26

79.93

3.05

2.1%

6.0%

WACLY

Wacoal Holdings

51.99

53.56

0

3.0%

3.0%

CHL

China Mobile

53.77

48.81

3.28

-9.2%

-3.1%

AEM

Agnico Eagle

39.40

37.30

0.82

-5.3%

-3.2%

NEM

Newmont Mining

40.03

24.86

0.98

-37.9%

-35.4%

As we can see, blindly purchasing the stocks produced by this screen would not have been a good idea. However, the major indexes significantly outperformed their historical averages during this period, and this screen was only ever intended to be a starting point for further research. I invested in RGR and CPSI after researching them further and did very well, so I still believe there is value in this screen. A few comments on the results before I run the new screen:

AEM stock dropped 18% three days after I published, which was pretty poor timing on my part. However, had it gone up by the same amount I would probably be saying how smart I am, so I have to accept the result (I try to be aware of my cognitive biases). The problem with buying gold miners (especially unhedged ones) is that your investment will be strongly influenced by the price of gold.

I investigated CPSI in more detail and am quite happy I did. Admittedly, macro factors (Affordable Healthcare Act, etc.) contributed to this result, but a strong balance sheet means a company is ready to exploit positive events.

SEP operates natural gas pipelines and storage facilities and has had a great year. I missed the boat on this one since I am cautious about mining and energy stocks, but since that same caution kept me out of the gold miners, it worked out quite well overall.

RGR was another company I decided to investigate further, and I am glad I did. Although the share price has retreated ~30% from its January highs, it is still up 25% and has been paying good dividends.

PG produced a fairly mediocre return of 6%. I said in the original article that "the shares may be a touch on the expensive side," it is pleasant to be proved right even if it hurts the overall performance of the screen.

Overall, the results are best described as a mixed bag, but that is probably the best that can be hoped for with a relatively simple screen. This year's version of the screen produces twelve possible stocks:

Annaly Capital Management (NYSE:NLY)

NLY is a REIT currently offering a very juicy 10.3% dividend yield (this is actually at the lower end of mREIT yields). It is a somewhat troubled stock - MRQ earnings missed analyst estimates by about 15% and book value per share is down about 20% compared to Q1 2013. The good news is that the book value climbed slightly from Q4. If NLY can maintain its dividend at current levels, it would be a nice investment -- however, that may be a big if.

China Mobile (NYSE:CHL)

CHL makes a repeat appearance in the screen. An investment in CHL would be something of a turnaround play as the business has been somewhat struggling recently. However, the yield is attractive and there is room for 3G growth in China, which could produce the turnaround investors would be looking for.

Chunghwa Telecom (NYSE:CHT)

The other China Mobile also returns to our screen results. Growth potential is very limited as mobile penetration in Taiwan is 115%, however, this does mean that CHT is well placed to remain the market leader as any future competitors would have to take market share from an existing player which is harder than simply growing faster than your rivals.

Compania Cervecerias Unidas (NYSE:CCU)

CCU is a beverage (both alcoholic and non-alcoholic) company that operates in South America (mainly Chile and Argentina. While it has a near-monopolistic position in the Chilean beer market (over 75% market share) the company has been acquiring unrelated businesses rather than defending its core operations (market share is down 9% over the last four years). That said, these mistakes may allow an investor to purchase a profitable business with high barriers to entry at a relatively low price.

Computer Programs & Systems, Inc. (NASDAQ:CPSI)

CPSI was one of last year's success stories from the screen. The political situation remains highly favorable. The American Recovery and Reinvestment Act and the Affordable Care Act mean that electronic health records are both required and subsidized, which means there should be plenty of business for the foreseeable future. CPSI has also maintained its attractive margins and balance sheet, so I suspect I will be content to maintain my position in the expectation of future growth.

Eli Lilly and Co (NYSE:LLY)

Eli Lilly is a pharmaceutical company. This is a nice defensive industry as people are going to get sick regardless of the economic cycle. Although it offers a good (3.2%) dividend and low volatility, the development pipeline currently looks weak. If the acquisition and development program bear fruit, then LLY may get back on track and offer investors a solid revenue stream into the future.

Lorillard Inc. (NYSE:LO)

LO is a tobacco company. Its main brand (88% of revenue) is Newport cigarettes. Obviously, if you are any sort of ethical investor, you can rule out LO. For the rest of us, cigarette companies do have very good customer retention and brand loyalty (at least until the customers die of lung cancer). LO is a market leader in electronic cigarettes, which could counteract the decline of the cigarette market. The current price is somewhat inflated due to merger talks with Reynolds, so until that is resolved, LO is more of a risk arbitrage play than a long-term investment.

NTT Docomo Inc (NYSE:DCM)

This year's list has a strongly Asian telecommunications theme to it. NTT Docomo is a Japanese mobile phone provider with its fingers in a few other pies (including credit, mail order, music software sales, mobile advertising, and the provision of Internet access services for hotels). Margins and revenue have been declining over the past few years, so DCM would either be a cash cow type investment or a turnaround play.

NutriSystem Inc (NASDAQ:NTRI)

To refer to the obesity epidemic almost seems clichéd now, but weightloss is big business. NTRI sells monthly food packages to its clients. This is an attractive model as subscription-based revenue is repeatable, and food is not a product that can easily be replaced with a smartphone app. NTRI's packages also fit into a modern convenience-based lifestyle. NTRI is also attempting to expand its distribution -- most notably through a deal with Wal-Mart (NYSE:WMT) - so there is potential for significant growth.

The Procter & Gamble Company (NYSE:PG)

PG makes consumer staples ranging from Ariel detergent to Wella hair coloring. It is dividend royalty, with 57 years of dividend increases (and 123 years of paying a dividend). In many ways, PG is the archetype of "boring is good" investing. Picking a good entry point is probably the biggest challenge here.

Vtech Holdings Ltd (OTCPK:VTKLY)

Vtech is a manufacturer of cordless telephones and electronic learning products. It has the license to manufacture AT&T (NYSE:T) (and Telstra for Australia) branded fixed-line telephones and accessories. Although the financials are reasonably appealing (for example 10% net margin, 37% return on equity), both cordless phones and dedicated learning hardware may decline as mobile phones and tablets become cheaper.

Wacoal Holdings (WACLY)

WACLY is a Japanese lingerie manufacturer. It appeared in the screen results last year, but I did not investigate as it was in the process of de-listing from NASDAQ. That uncertainty has been resolved. The net margin is on the slender side (7.61%), but the company seems well managed, so it may be worth further investigation.

The companies in this list come from a variety of industries, countries, and even stages in their life cycles. Which are most interesting for further research depends on your investment objectives and needs, but I plan to look at several of these companies more closely in the next few weeks.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: A Boring Sequel - Revisiting The Boring Stocks Screen