5 Palm Tree Stocks For A Profitable Portfolio

Includes: CL, GIS, ORLY, SO, WMT
by: Dividend Kings

The palm tree: It conjures up an image of sitting on a Caribbean beach with a fruity (non-alcoholic of course) drink in my hand while the sun glows on my face. Palm trees also make me think of hurricanes. Any time summer rolls around it is inevitable there is a hurricane blasting an island in the Atlantic. When newscasters report hurricanes on the news we always see palm trees swaying violently in the wind. The palm trees bend but don't seem to break. An important part of an investment portfolio is defense to take some of the volatility out of a portfolio when the market has a down year. One good way to play defense in your portfolio is with what I call palm tree stocks. A palm tree stock is one that holds its ground while the market falls and shows some growth when the market rebounds.

The way to find a palm tree stock is to look at the performance of a stock in flat or down years like 2007, 2008 and 2011. If we look at the performance of the S&P 500 equal weighted index ETF RSP, we see no return in 2007 and 2011 and a drop of around 40% in 2008 (not including dividends). So if a company performed relatively well in those years, it can be considered a palm tree stock. Five stocks that performed relatively well in those years are Wal-Mart (NYSE:WMT), General Mills (NYSE:GIS), Colgate Palmolive (NYSE:CL), Southern Company (NYSE:SO) and O'Reilly Automotive (NASDAQ:ORLY). Below is a spreadsheet showing the stock price returns (not including dividends) of these five stocks.





























Wal-Mart is trading near $61 with a dividend yield of approximately 2.4%. Wal-Mart CEO Mike Duke recently announced that the majority of products sold by the retailer are U.S. made. This can only help the company in its quest to lure shoppers away from major competitors. The company is in the midst of a $15 billion stock buyback program that will continue to support its share price. In its latest earnings report on November 15th, Wal-Mart reported EPS of 97 cents a share, missing estimates by 1 cent. Revenue came in at $110.23 billion while estimates were for $107.98 billion. Wal-Mart has over $7 billion in cash, indicating a likelihood of increased dividends in the future. Additionally, Wal-Mart is experimenting with offering healthcare services in its stores. If this takes hold nationwide, it could prove to be a huge revenue stream for the company.

General Mills is trading around $40 with a dividend yield of approximately 3%. General Mills continues to see emerging markets as a significant source of growth, given that 95% of population growth will be in emerging markets. The company is on pace to reach a goal of $18 billion in net sales in 2015 with a 5% growth rate. In its latest earnings report in December, General Mills reported EPS of $.76 a share, below the $.79 estimate. Revenue was at $4.62 billion, slightly above estimates of $4.6 billion. General Mills stacks up well compared to its main competitor, Kellogg (NYSE:K). If we compare quarterly revenue growth and profit margin of the two companies we find that General Mills achieved 13.7% vs. 4.3% and 10% profit margin vs. Kellogg's 9%, making General Mills a solid choice in the food space.

Southern Company is trading around $45 with a dividend yield of approximately 4.2%. The company recently affirmed its long term growth trajectory of 5-7%. On January 25th the company reported earnings of 30 cents per share, in line with estimates, on $3.7 billion in revenue, slightly below estimates of $3.72 billion. The stock has been on a solid uptrend since early 2011 and has a relatively high P/E for a utility stock at 17. But after a pullback, with a 5-7% expected growth rate and a 10-year history of increasing dividends, the company can be a solid addition to any portfolio.

Colgate Palmolive is trading around $90 with a dividend yield of approximately 2.6%. Colgate Palmolive has an almost unheard of history of paying dividends. The company has paid uninterrupted dividends since 1895 and has increased dividends for 48 consecutive years. In its latest earnings report on Jan. 26, the company reported earnings of $1.31 vs. a $1.30 estimate. Colgate gets more than half its sales from emerging nations. As the emerging nations continue to gain wealth, Colgate is set to benefit greatly. However, with a P/E approaching 19 and a five-year earnings growth estimate of 8.8%, it might be a wise idea to wait for a pullback before jumping in to this stock.

O'Reilly Automotive is trading around $82. It does not pay a dividend. This is a speculative play compared to the other stocks mentioned. However, the company is in the sweet spot of a growing trend in the United States where Americans are keeping their cars for longer than ever. According to Polk, the average automobile age has grown to a record 10.8 years. This trend is great news for O'Reilly. With the economy continuing to stagnate, Americans would rather fix their older cars than replace them with a new one. The company is in the midst of a $1.5 billion share repurchase program and is scheduled to release earnings on Feb. 8. O'Reilly has beaten yearly estimates for the past two years. With a forecast earnings growth rate of 17.19% and a history of beating estimates, at a P/E of around 23, O'Reilly appears to be in a position to outpace market returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.