In this article I will discuss five companies that are selling at attractive prices and which, I estimate, will outperform the market as a whole. These five selections are either (A) strong cash generators, (B) pay a stable dividend, (C) have undervalued fundamentals compared to peers, or (D) all of the above. Buying these five stocks will provide an average investor with a good diversification and exposure to the stock market at reasonable prices.
Merck (NYSE:MRK) is trading around $39 per share at the time of this analysis near the high point of its 52-week trading range of $29.47 to $39.43 per share, has 3.05 billion shares outstanding for a market capitalization of nearly $119 billion, and pays a quarterly dividend of $0.42 per share for an annual dividend yield of 4.3%. Merck has a solid balance sheet with $15.6 billion in cash and only $15.7 billion in long-term debt as of September 30, 2011. In 2010 it generated $10.8 billion in cash from operations and $9.2 billion for the first nine months of 2011. Merck can clearly support its dividend payout and is also returning cash to shareholders by repurchasing shares. The company has a strong pipeline of existing drugs and vaccines and is spending heavily on research and development ($6 billion year to date as of September 30, 2011) which should ensure continued market success for its products. In addition, Merck will continue to generate $3.5 billion of annual synergies from the acquisition of Schering-Plough announced in early 2009.
Yamana Gold (NYSE:AUY) recently traded at a 52-week high of around $18 per share (the low was $11.10 per share), has 745.8 million shares outstanding for a market capitalization of 12.9 billion, and pays a $0.05 per share quarterly dividend for an annual dividend yield of 1.1%. This gold producer has a low leverage with only $430.1 million in long-term debt and $570 million in cash and a price to book ratio of 1.8 as of September 30, 2011. The gold industry price to book ratio is nearly five for comparison. Also, Yamana is a very efficient gold producer with earnings before interest, tax and depreciation margin of 57.8% compared to the industry average of 31.5%. Yamana Gold is currently an undervalued gold producer with a relatively stable stock. Finally, the company reported in the beginning of 2012 to have significant gold reserves and expects to increase gold production in 2012 and 2013 from 2011 levels by 13% and 43%, respectively. In 2014, Yamana expects to reach a sustainable annual gold production of about 1.75 million gold equivalent ounces. All this bodes well for long-term investors in this gold producer's stock.
Sirius XM Radio (NASDAQ:SIRI) is trading at around $2 per share at the time of this writing, has a 52-week trading range between $1.27 and $2.44 per share, and its market capitalization is $7.6 billion (3.75 billion shares outstanding). For the first nine months of 2011, SIRI has generated cash flow from operating activities of $329 million and does not have a viable competitor in the satellite radio area. Sales have been growing much faster than the sales of the average S&P 500 member for the past five years (63% vs. 9%) and the company should continue to grow its sales as auto sales, where most of its products are sold, continue to recover. Sirius XM Radio has an earnings before interest, tax and depreciation margin of 26% which is also better than that of the S&P 500 (19.7%). Mel Karmazin, the company's CEO, is a talented veteran of the radio entertainment industry and is known for his skill in driving up share prices of the companies he runs. Sirius XM Radio is a good investment at $2 per share.
Bank of New York Mellon (NYSE:BK) stock has been recently selling at around $20 per share, pays a quarterly dividend of $0.13 per share for an annual dividend yield of 2.1%, and has 1.21 billion shares outstanding for a market capitalization of $24.3 billion. In addition to paying a stable dividend, the company's price to book value ratio is at 0.7. A price to book value of less than one is a clear sign of an undervalued investment. Its price to earnings ratio is 9.9, also significantly lower than the industry and S&P 500 price to earnings ratios of 13 and 14.1, respectively. The company has mostly institutional clients and less exposure to investment, commercial and retail banking. Overall, Bank of New York Mellon is a more asset servicing oriented bank, which stock price has declined unjustifiably low after the recent banking crisis and is a good investment opportunity.
Caterpillar (NYSE:CAT) recently traded around $109 per share, has a 52-week trading range between $67.54 and $116.55 per share, 646.6 million shares outstanding for a market capitalization of $71 billion, and pays a quarterly dividend of $0.46 per share for an annual dividend yield of 1.7%. Caterpillar trades at a price to earnings ratio of 14.9 which is close to the industry and the S&P 500 average price to earnings ratios. On January 26, 2012, Caterpillar announced that it expects earnings per share for 2012 to be around $9.25 for a forward looking price to earnings ratio of 11.8. It is clear that Caterpillar stock price will rise in 2012. While optimistic, this growth is achievable as Caterpillar provides equipment to a variety of industries worldwide including mining, construction, infrastructure improvement, energy and agriculture. Assuming a price to earnings ratio of 15 at the end of 2012 and net earnings of $9.25 per share gives a price of about $138 or a rise of over 25%. At the same time investors in the stock are paid 1.7% while waiting for this gain to materialize during the next one to two years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.