Safe money investment can be a cinch. You'll know what to look for after you read this article.
What is a safe money investment?
Safe money investments have two characteristics –
1. Value that will last. Real, significant, durable value.
- Trendy stocks whose price is built on hype and hope are out.
- You want companies whose assets can be turned into cash.
A price well below their value.
- Great companies bounce back from a down market or a temporary slip.
What is value in a company?
Three things to look for in a good safe money investment –
1. Lots of cash.
- Cash keeps the business going when sales dip. It's insurance.
- Cash pays for sales and advertising.
- Cash pays for research, new equipment, and acquisitions.
- Cash pays for growth.
2. Little or no debt.
- Debt payments take money away from profitable activities.
- When times are tough, debt payments can drag a company under.
- A safe money investment can pay all its debt, with cash left over.
3. Lots of free cash flow.
- Free cash flow is the money that's left after all costs of operating a business are paid.
- Free cash flow can add to a company's cash or reduce its debt.
The opposite of a good safe money investment –
- A company with huge loans, searching for future earnings that may never arrive.
- A company spending more than it makes.
Companies like that may make good, but they often flame out. Companies that keep their value often look "boring" to investors chasing the latest hot stocks.
When is a price well below the value of an investment?
Here are two definitions of safe stock prices – both work.
1. Price less than 15 times free cash flow.
- Blue chip stocks often sell for around 30 times free cash flow. Half that is a bargain. Your stock could double in price.
Price to Sales Ratio below 0.9.
- History shows double digit annual returns for such stocks over 5 years. Price to Sales Ratio over 0.9 returns less than half that.
Two other popular definitions use the Price to Earnings Ratio (P/E), and the Price to Book Ratio (P/B). These don't work quite as well, because -
- Earnings are often manipulated.
- Book value may not accurately reflect the value of intellectual property such as software and patents.
Now that you know what a safe money investment looks like, you also know when to get out. Never hang on when a company loses its value or gets too expensive. Don't be afraid to sell, even if you've held for years.
Here are three safe money stocks to buy for long-term holding:
Intel (INTC) is the world's leading manufacturer of integrated circuits.
- INTC last closed at $21.20, with $112.4B market cap.
- INTC has $11.98B in cash, and $2.31B in debt.
- INTC has enough cash to pay its debts with plenty left over.
- INTC sells for 14.8 times its free cash flow – a bargain.
- With $7.6B in free cash flow, INTC could buy itself in 15 years.
- INTC does have a high Price to Sales Ratio of 2.49.
- The market may worry about Intel's sales growth.
- With all that free cash flow, INTC is still safe.
Aetna (AET) is among the largest healthcare insurers in the U.S.
- AET last closed at $43.28, with $16.42B market cap.
- AET has $3.5B in cash, and $4.09B in debt.
- AET sells for 9.95 times its free cash flow – a bargain.
- With $1.65B in free cash flow, AET could buy itself in 10 years.
- AET's Price to Sales Ratio is 0.49.
United Healthcare (UNH) is another among the largest healthcare insurers in the U.S.
- UNH last closed at $50.46, with $54.67B market cap.
- UNH has $12.15B in cash, and $11.78B in debt.
- AGP has enough cash to pay its debts.
- UNH sells for 10.3 times its free cash flow – a bargain.
- With $5.3B in free cash flow, UNH could buy itself in 10 years.
- UNH's Price to Sales Ratio is 0.57.
The lesson is that low risk makes for big profits. Don't gamble, especially with your retirement investments. You'll make more money by playing it safe.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.