Many analysts and rating houses are expecting the sluggish economic recovery to continue and this will obviously affect the performance of the stock market. Moody's recently reported; "that the recent political wrangling over the U.S. debt ceiling and the revived debt crisis in Europe as leading factors in the bleaker economic picture." In such an economic environment with heightened market volatility I believe it is important to consider which stocks represent the best low risk investments that will deliver both income and growth. I have chosen a basket of five stocks that I believe are low risk but have solid growth potential as they have betas of less than 1, a price to earnings ratio of less than 15 and five-year growth rates of greater than 25%. I will apply my unique analysis to show why you should consider these stocks. Please use my research as a starting point for your own due diligence. As this is a just a screen, more in-depth analysis should be utilized to come to a final investing decision.
Advance Auto Parts Inc (AAP)
Many analysts believe that the auto parts stores industry is particularly resilient to downturns in the economy because since 2009, earnings in the industry have continued to grow at a slow and steady pace despite the recessionary economic climate. When this is considered in conjunction with Advance Auto Parts profit margin of 7%, which is the third highest in its industry, earnings per share of $1.41 that is the highest in its industry and a PEG ratio of 0.51 Advance Auto Parts is well positioned to continue generating strong earnings. With a return on equity of 39% any increased earnings should translate into solid increases in net income. Its earnings yield of 7%, which is double the current ten year bond yield, indicates that the stock is undervalued. Advance Auto Parts is a solid candidate for further evaluation.
Advance Auto Parts is a retailer of automotive aftermarket parts, accessories, batteries, and maintenance items. Its earnings are dependent on consumer discretionary spending, which has dipped in the current sluggish economic environment. It has a market cap of $5 billion, with a 52 week trading range of $49.50 to $72.32. It is trading close to its 52 week peak at around $68, with a price to earnings ratio of 14. Its third quarter 2011 earnings have remained unchanged from second quarter earnings of $1.5 billion. Net income has decreased by 6% to $106 million from $113 million for the second quarter.
Advance Auto Parts' quarterly revenue growth of 4% is the lowest in its industry segment and is well behind one of its competitors AutoZone Inc (AZO), which has quarterly revenue growth of 7%. However, it is return on equity of 39% is higher than AutoZone's -78% and is the highest for its industry segment.
Sunoco Logistics Partners LP Co (SXL)
Sunoco provides transport and storage of refined oil products and crude oil services, as well as the purchase and sale of crude oil in the U.S.. It operates approximately 2,200 miles of refined product pipelines that transport gasoline, heating oil, diesel and jet fuel, and liquefied petroleum gas (LPG). It has a market cap of $3.7 billion, a 52 week trading range of $24.40 to $37.98 and it is trading close to its 52 week peak at around $35. It has a price to earnings ratio of 15. For the third quarter 2011 it reported an increase in earnings of 21% to $2.9 billion from $2.4 billion for the second quarter. Net income increased by 1% to $95 million in the third quarter. Sunoco's balance sheet strengthened in the third quarter with a 33% increase in cash and cash equivalents, with the company reporting $8 million up from $6 million in the second quarter.
Sunoco is performing strongly in comparison to its competitors, outperforming Enterprise Products Partners LP (EPD) with quarterly revenue growth of 52% versus 40% and a return on equity of 27% versus 15%. Sunoco is also one of the top performers in its industry with quarterly revenue growth of 52%, versus an industry average of 12.5%, and a return on equity of 27%, versus an industry average of 11%.
Sunoco recently completed a two for one stock split in early December and prior to the split it was trading at a new 52-week high of around $100. Post split it is now trading at a more affordable price of around $35 with greater liquidity. Overall Sunoco represents a solid investment opportunity as not only has it increased its earnings and net income in a difficult economic environment, but it has also strengthened its balance sheet. When analyzing the company's performance metrics this becomes even more apparent, as it has a profit margin of 3% and the third highest return on equity for its industry of 27%. Sunoco also pays an attractive dividend yield of around 4%, which based on the company's current financials, should be sustainable in an economic downturn. The company has a massive earnings yield of 20%, which is six times the current ten year bond yield and this indicates that at current trading prices the company is significantly undervalued. The stock also has very low price volatility with a beta of 0.03, which makes it an ideal defensive stock when its dividend yield is considered. This is a good candidate for further research. The stock appears unfairly discounted.
Abbott Laboratories (ABT)
Abbott Laboratories is the world's largest producer of nutritional products and the second largest of diagnostic products worldwide. It has a market cap of $85 billion, a 52 week trading range of $45.07 to $55.61 and it is trading close to its 52 week peak at around $55. It has a price to earnings ratio of 19. It reported a 2% increase in third quarter 2011 earnings to $9.8 billion, from $9.6 billion in the second quarter. Net income dropped by 84% in the third quarter to $303 million, from $2 billion in the second quarter. It reported a stronger balance sheet with a 25% increase in cash and cash equivalents in the third quarter to $5 billion, from $4 billion in the second quarter.
When compared to its competitors Abbott Laboratories' is performing quite strongly with its quarterly revenue growth of 13% outperforming Roche Holdings AG (OTCQX:RHHBY) -12%, although its return on equity of 20% is lagging behind Roche's 92%. Abbott Laboratories is also performing well in comparison to its industry, outperforming many of its competitors with quarterly revenue growth of 13%, versus an industry average of 11%, and a return on equity of 20%, versus an industry average of 16%.
Abbott Laboratories has strong growth prospects by virtue of its size and diversified product and service offering, which is constantly being added to. This is highlighted by the commencement of trials for Absorb a bioresorbable vascular scaffold product, which if successful should become a highly profitable product offering. Like any solid defensive stock its volatility is quite low with a beta of 0.32. It also has a healthy debt to equity ratio of 0.68, which coupled with increased cash means the company is well positioned to cope with any further economic headwinds. As a low risk investment opportunity the stock only gets better due to its attractive dividend yield of 3.5%, and earnings yield of 5% that shows it is relatively cheap in comparison to current bond yields. For all of these reasons Abbott Laboratories could be a solid defensive play. It is a good candidate for further research.
United Health Group Incorporated (UNH)
United Health Group provides healthcare, health benefits and insurance services in the United States. Its key customers are national employers, public sector employers, mid-sized employers, small businesses, and individuals. It has a market cap of $52 billion, with a 52 week trading range of $34.98 to $53.50 and it is trading at around $49, which is close to its 52 week peak. It has a price to earnings ratio of 11. Third quarter earnings 2011 have remained unchanged from second quarter earnings of $25 billion. Net income also remained unchanged at $1.3 billion. United Health Group has strengthened its balance sheet in the third quarter 2011, with cash and cash equivalents rising by 40% to $13.7 billion, from $10 billion in the second quarter. It has also increased its net tangible assets by 18% in the third quarter to $1.3 billion from $1.1 billion in the second quarter. The United Health Group has quarterly revenue growth of 7%, a return on equity of 18%, and pays a dividend with a yield of 1%.
When compared to its competitors United Health Group stacks up well. It is outperforming WellPoint Inc (WLP), with quarterly revenue growth of 7% versus WellPoint's of 5% and return on equity of 18% versus WellPoint's 12%. It is also performing quite strongly in comparison to its industry competitors, with quarterly revenue growth of 7%, versus an industry average of 22%, and a return on equity of 18%, versus an industry average of 17%, indicating that it is delivering a better return on shareholder equity than many of its competitors but is lagging behind on revenue growth.
As the largest health insurer in the U.S. with more than 75 million customers the United Health Group is well positioned to drive additional earnings growth and income through cost efficiencies and scale alone. The future earnings outlook is also quite promising as the U.S. has an aging population with demographic trends pointing to much higher future healthcare spending as a whole generation of baby boomers is starting to reach retirement age. With a strong balance sheet and a debt to equity ratio of 0.43 it is well positioned to weather any further economic headwinds and when this is considered in conjunction with its PEG ratio of 0.83, the company is well positioned to capitalize on any uplift in the economy. The company's earnings yield of 9% indicates that it is undervalued in comparison to ten year bond yields.
Nasdaq OMX Group Inc (NDAQ)
Nasdaq provides trading, clearing, exchange technology, securities listing, and public company services worldwide. It also provides broker services comprising of technology and customized securities administration solutions to financial participants. It has a market cap of $4 billion and a 52 week trading range of $20.32 to $29.71. It is currently trading at around $24, with a price to earnings ratio of 10. Third quarter earnings 2011 rose by 14% to $916 million from $805 million for the second quarter. Net income increased by 20% to $110 million from $92 million for the second quarter. It has quarterly revenue growth of 25% and a return on equity of 9%.
Nasdaq stacks up well against its competitors, outperforming the CME Group Inc (CME), with quarterly revenue growth of 25% versus 19%, and a return on equity of 9% versus 6%. It is also performing strongly in comparison to its industry competitors with quarterly revenue growth of 25%, versus an industry average of 15%, and a return on equity of 9%, versus an industry average of 6%.
Nasdaq is a well diversified exchange operator with decreasing dependency on trading related revenues as it broadens its business offerings into brokerage and trading systems. It has a solid profit margin of 12%, which is the fifteenth highest in its industry, indicating that it is able to cost effectively translate earnings into net income. I also believe that the company's defensive business mix is well positioned in times of slowing capital markets activity and a sluggish economy. Yet with a debt equity ratio of 0.43 and a PEG ratio of 0.16 it is well positioned to capture earning growth when the economic and market environment improves. At current prices, with an earnings yield of 10%, shares appear undervalued in comparison to ten year bond yields. Therefore, the company is a solid candidate for additional research. Shares appear discounted but further investigation is warranted.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.