As the market begins to stabilize after the sharp correction, long-term investors may want to build positions in companies with strong fundamentals, and leading positions in their industries. Here we provide seven stocks that we think they will outperform the market:
Stryker (SYK), a leader in medical surgical equipment and orthopedic implants. At $46, the company is nearly 25 percent below its pre-correction price. Though part of the correction has to do with budgetary cuts, Stryker is in the right business at the right time, as it is riding the trend of the massive aging of the baby boomers. Since it went public in 1979, sales and earnings have grown at a very rapid rate, with sales reaching 7.3 billion in 2011 (an 8.9 percent increase over the previous year) and earnings per share of $3.33 (a 12.6 percent increase over the previous year leading to a P/E ratio of 14.7). This strong performance has allowed the company to raise its dividend from 0.50 cents in 2009 to 60 (1.20 percent) cents in 2011, the sixth consecutive increase since 2004.
Stryker’s success comes from three sources:
- Operational effectiveness, the ability to cut costs and improve quality to comply both with strict FDA standards, and government mandates to reduce healthcare costs.
- The introduction of new products, through internal R&D and the acquisition of other companies. In 2010, for instance, the company received 108 patents, and acquired the Neurovascular business of Boston Scientific.
- The nurture of a strong corporate culture, ranked 68 among the "100 Best Places to Work For" in the 2009 listing.
Stryker is firing on all cylinders and is gaining market shares in the industry. Its strong performance sharply contrasts with the one of its closest competitor Zimmer Holdings (ZMH) that only experienced a 2.5 percent sales growth and a -77.50 earnings growth. Stryker's stock has gained over 20 percent over the previous year—though both stocks trade in tandem. Stryker is a stock to buy and forget that you own it for the next 10 years.
Bristol-Myers Squibb (BMY) has taken two hits in recent years. The first hit came from the prospect of the expiration of one of its blockbuster anti-platetet drugs, Plavix, in 2012. The second hit came from proposed budgetary cuts for Medicaid and Medicare. Yet the stock is trading near its five -year high. We be believe the stock is a buy, for four reasons:
- A Bullish chart. Amid an unsettled market, the stock has been trading decisively above its 100- and 200-day moving averages.
- Strong financials. Hefty operating margins, above its peers Pfizer (PFE), Abbott Laboratories (ABT), Eli Lily (LLY) and Merck (MRK).
- The market has already discounted the expiration of its blockbuster drugs and Medicaid and Medicare budgetary cuts.
- A hefty, 4.60 percent dividend, compared with 1.88% for S&P 500 (NYSEARCA:SPY) stocks.
- A strong pipeline of new products, some of which have already gained FDA approval.
Applied Materials (NASDAQ:AMAT) had several setbacks in recent years that have depressed its stock. But by now, most of these setbacks are over:
The company has recovered from a temporary setback in its Japanese operations in the aftermath of the March 11, earthquake.
Applied Materials is well positioned to take advantage of the improving industry fundamentals. Applied Materials operates in four segments:
- The Silicon Systems group develops equipment for the chip fabrication process and accounted for 55% of FY 2010 sales.
- Global Services provides services to improve the efficiency of semiconductor factories and accounted for 20% of FY 2010 sales.
- The Display segment develops equipment used to produce flat panel displays and accounted for 9% of FY 2010 sales.
- Finally, Energy and Environmental services produces equipment used in the production of solar cells and energy efficient glass and accounted for 16% of FY 2010 sales.
Solid fundamentals, hefty profit margins, high quarterly growth, and plenty of barriers to entry to its market. Applied Materials has a solid balance sheet with nearly $2.6 billion in cash and only $200 million in long-term debt. On a valuation basis, the stock is relatively cheap, with a low P/E ratio. Based on its projected ROE and retention rate, the long-term sustainable rate of growth in earnings (retention rate times ROE) should be in the range of 12 to 15%. This implies a PEG ratio (based on the current forward P/E ratio) of less than one, indicating a favorable investment opportunity.
A demonstrated record of innovations — the company has been producing materials for fast growing industries like smart phones and solar panels.
A 2.8% dividend — unusually high for technology companies — not that bad for a high-technology company in a low interest environment.
Apple (NASDAQ:AAPL) is, perhaps, the most promising technology company that will be helped by the iPhone 4S release, and from lower component costs. The company further seems to move smoothly to fill the leadership vacuum left after the passing of Steve Jobs. However, Apple is facing potential competition from Google (NASDAQ:GOOG) with acquisition of Motorola Mobility (MMI) that is expected to create Apple’s first serious challenge in the iPhone market, especially in emerging markets. Already Dell Computer (DELL), and Baidu (BIDU) have teamed together to manufacture and market Android-based phones in the Chinese market.
A still ascending angel from the dot.com years, Amazon.com (NASDAQ:AMZN) has demonstrated a remarkable ability to re-invent itself and expand into new business, including reading devices that may end up gaining an edge even against Apple. Amazon.com's, immediate future, however, is challenged by extremely low operating margins; the shifting of the book sales industry from hard copies to e-books, an area with fewer barriers to entry; a loss of focus—the company is trying to compete head to head with Apple in wireless devices, a business outside its core competence; and a shift in momentum, due to deferral of Internet-based IPOs like Zynga and Groupon.
Intel (NASDAQ:INTC) is another fallen technology angel, suffering from the shift of the industry from PCs to mobile devices. Recently, however, Intel has come up with new products to catch up with the trend. Intel’s fundamental’s have been improving:
A low valuation. At $22.80, the company trades close to 60 percent below its 2000 highs—with forward P/E below the industry average. One of the reasons for this low valuation is the investor belief that Intel’s business has suffered a setback after the March 11th tsunami. This isn’t true, however, as only 10 percent of its revenue comes from Japan.
Advanced Micro Devices (AMD)
Texas Instruments (TXN)
The company’s fundamentals have been improving. Net revenue rose, from $35.1 billion in 2009 to $43.6 billion in 2010, while diluted earnings per share rose from .77 to $2.05. The company has further maintained its lead in plant and equipment and R&D investments.
An upgrade cycle and favorable US tax legislation is expected to boost semiconductor sales. According to the Semiconductor Industry Association, global sales of semiconductors totaled $25 billion in May, up 1.8 percent from April, and 1.3 percent from a year earlier. The Association further expects industry sales to grow by 5.4 percent this year, and by 7.6 percent in 2012.
Binding entry barriers make the industry an oligopoly that allows Intel as the larger player to enjoy economies of scale, while maintaining pricing power.
Intel has been boosting its dividend for the last five years—now standing at 3.40 percent—among the highest in the high-tech industry.
JPMorgan Chase & Co.
Better technical indicators. Actually, the charts for the two banks do not look terribly good. But JPMorgan stock's technicals aren't as bad as those of Bank of America: JPMorgan's stock trades below both its 200- and 100-day averages, but the 100-day average is still well above the 200-day average. Bank of America's 100-day average is trading below the 200-day average.
Better fundamentals. JP Morgan's financials are definitely better than those of Bank of America. The company pays a 2.5% dividend - much higher than the 0.40 percent of Bank of America - and much better than what investors can make by depositing money in either bank. JPMorgan has further better operating margins, and quarterly and annual revenue growth.
Better strategy. JPMorgan has made good strategic choices during the subprime crisis, picking up the assets of other financial companies and banks at bargain prices, including Bear Sterns and Washington Mutual. By contrast, Bank of America has made bad strategic choices during the crisis, picking up the liabilities of Countrywide Financial and Merrill Lynch. The aggressive corporate culture of these two companies, further, do not blend well with Bank Of America's conservative ethos.