Here’s the second installment of Jim Cramer’s new buy list. Investors looking for fresh ideas from Cramer should dig deeper into these stocks. This list features mostly solid and defensive companies that are perceived as safe havens stocks for conservative investors.
International Business Machines Corp. (IBM)
In a period of volatility, it is not easy to be an investor. The litmus test of a good investment is whether our portfolio holdings allow us to sleep well at night. A good method would be to scout for companies that are poised for long-term growth, generate modest cash flows, sit on a considerable amount of cash and are reasonably priced. Such is the case of cash-rich technology stocks, such as IBM, Cisco Systems, Inc. (CSCO) and Intel Corporation (INTC). In the case of IBM, it is a growing company with good exposure geographically. It is generating operating cash flow of $19.24 billion, and sits on $11.79 billion of cash.IBM is expected to earn revenues of $107.91 billion this year, +8.10% and earnings per share of $13.33, +15%. In terms of valuation, it is reasonably priced, at 12.61 times this year’s earnings, with a dividend yield of 1.80%.
With the trends favoring mobile phones and tablets, the company may be on its way to delivering long-term superior performance on its cloud business segment. Management seems to be aware of its long-term strategy and has ensured that they meet their targets. It has stated that earnings per share should hit at least $20 in 2015, implying an annual growth of 14.7% over the next 5 years. At a historical multiple of 13 times earnings, IBM should at least trade $260 or higher than 54%, over the current price.
Sanofi SA ADR (SNY)
Healthcare stocks are safe-haven in a period of prolonged uncertainty in the market. Over the near term, volatility in the sector is expected. The government’s planned fiscal austerity has pushed these stocks to new lows, as investors have disregarded fundamentals. There is speculation that the US will soon reduce its drug reimbursement payments. In the long run, the industry backdrop appears to be attractive. Aging populations in the matured market, as well as strong growth opportunities in the emerging markets, bodes well for the sector.
We carefully choose an attractive global healthcare company, SNY. The stock is currently trading at 6.79 times 2011 earnings, with a dividend yield of 3.90%. The balance sheet is pristine, with debt of 38.10% of its net worth. It also generates cash flow of $13 billion a year at current levels, which is expected to grow further, given its acquisition of Genzyme, as well as 55 projects in the pipeline. The cash flow yield alone is at 14.73%, which means that buying alone at these levels gives you a free optionality on growth. We would feel comfortable knowing that Ken Fisher and Charles Brandes own 13 million and 6 million shares, respectively.
Starwood Hotel & Resorts Worldwide, Inc. (HOT)
Hospitality stocks have seen the value of their shares decline this year. Over the last six months, shares of Starwood Hotel & Resorts Worldwide, Inc. have fallen by 32.66%. Competitors Marriott International, Inc. (MAR) and Hyatt Hotels Corporation (H) share the same fate. Shares have both fallen by 31% in the last 6 months. Investment bank Jefferies came out with a bearish report on the industry, and downgraded hospitality stocks to hold and underperform.
Given uncertainties surrounding the global economy, investors do not want to own stocks like HOT. Approximately 60% of its operations are outside the United States, which would expose it to the vagaries of the global economy. First, the Japanese earthquake has impacted their earnings. Second, the geopolitical concerns in the Middle East have also affected their operations. Third, the debt issues around Europe have also limited their earnings potential. The silver lining is that HOT’s financial performance has improved since financial crisis levels. Analysts are expecting revenues of $5.96 billion next year, higher than 35.80% year on year. This is higher than MAR’s revenue growth of 25.90%, but lower than H’s 70.20%. The stock is trading at 18.31 times forward earnings, lower than peer multiples of 23.1 times earnings. We recommend investors to be cautious with buying shares of HOT, as earnings will be limited by the weakening global economy.
U.S. Bancorp. (USB)
This bank stock is a core holding of Warren Buffett's. Based on the June filing, Berkshire Hathaway owns 69 million shares of this Minneapolis-based bank. Buffett has so much confidence in the bank that he increased his stake during the financial crisis of 2008. The Oracle of Omaha has cherry-picked financial stocks that are better positioned to weather the storm. During this period, USB has bought failed lenders, increased headcount and improved its technology.
With the current bearish outlook on the economy, resurgence of sovereign debt issues and uncertainties in global growth, financial stocks have once again declined. Shares of USB have fallen by 18.67% for the year. The market must have ignored the improving fundamentals of USB. In the recent quarterly report, it has showed positive figures. The company reported 2nd quarter earnings per share of $0.60, and will be on its way of beating analysts’ expectations of earnings per share of $2.31. The better than expected performance is attributed to lower provisioning from favorable credit conditions. The stock is trading at 9.48 times this year’s earnings, 1.45 times book value and 2.20% dividend yield. This is somewhat higher than Wells Fargo & Company (WFC)’s 8.58 times this year’s earnings and 1.02 times book value. Investors are paying up for better credit quality and stable future earnings. Analyst estimate that shares of USB are valued at $30 a share, which implies an upside of 36.90% at current prices.
Stryker Corp. (SYK)
Stryker Corp is a medical technology company that has strong positions in major categories of the orthopedic market, notably in the implants used in joint replacement, trauma and spinal surgeries. The company has been steadily growing its revenues of 5% over the last five years, with net profit margins of 17% and return on equity of 16%. It has a cash position of $2.68 billion, with minimal debt at 13% of net worth. Meanwhile, the company generates cash flow of $1.31 billion, which translates to a modest yield of 7%. These solid cash flow figures and strong balance sheet will give the company enough flexibility for increased research and development costs, dividends and acquisitions. All of these points to a higher shareholder value in the future.
The main risks in the near-term are that pressures from fiscal austerity of the government affecting the healthcare sector, as well as lower than expected capital spending of hospitals from continued weakness in the economy. On a longer term, earnings growth will be driven by favorable demographics. At current prices, the stock is currently trading at 13.08 times this year’s earnings, 2.38 times book value and dividend yield of 1.60%. This is certainly lower than peer Zimmer Holdings, Inc. (ZMH) 16 times earnings and 1.68 times book value. Since the Street focuses on near-term risks, the stock has declined by 10.24% for the year. Investors who focus on the long term fundamental appeal of SYK will be rewarded over time.