Warren Buffett published a piece in Fortune recently, which bring up a great point -- cash is trash over the very long term. Hiding cash under a mattress is not a sound long term investment approach. Dividend paying stocks of great businesses with strong management teams make for the very best investment returns over the longer term.
While the past decade has been marked with sharp selloffs and back and forth volatility, the future is all that investors should be concerned with when it comes to where to place their long term bets. While we think farmland, timberland, real estate and rental property could outperform equities over the next decade; we think Buffett is 100% correct in stating that over the very long term stocks make a great amount of sense for the average saver when compared to holding cash or bonds.
With that being said, over the short run stocks have run pretty far pretty fast, and the overall market is not all that cheap based on a Shiller P/E ratio, also known as the P/E 10. In any market there are bargains, overvalued issues, and there are value traps alike. We think these 6 stocks represent good values and should outperform most assets and especially bonds over time.
We have selected these specific stocks because over many years these companies have proven that they can deliver profits to long term buy and hold shareholders. These stocks have also lagged their peers in the short run, which means they should protect capital better in case of a sharp correction. High-beta momentum stocks that are grabbing all of the investment headlines usually get slammed the hardest when gravity takes hold at the end of parabolic market moves.
Coca Cola (KO) -- Coca Cola is not only a great company and the largest hoding of Buffett's Berkshire Hathaway, it is also an iconic American success story -- Coke's stock has risen by over 20% a year over the long haul. Today, the stock is trading at the lower end of its historical average PE ratio and the 3% dividend is much more appealing than owning a 30 year US bond. At 15X forward earnings, Coke looks like a good place to put long term capital.
Procter & Gamble (PG) -- Another Iconic American stock that hasn't moved during this latest bull market run is P&G. Though the company has to be described as a leveraged business, Procter & Gamble have one of the strongest cash flow moats of any of the well known blue chip staple stocks. P&G looks fully priced on trailing earnings, but cheap at 14.7X analyst projected earnings. PG also sells for around 11X EV/EBITDA and pays out a hedfty 3.3% dividend yield. The company is well run and I expect more from the stock over the next year than investors received over the last year.
Johnson & Johnson (JNJ) -- Staples are pretty out of favor right now. Let's face it, Band-Aids and shampoo don't have the same curb appeal that robotic surgery, biotechnology, nanotech, and financials have, but the stocks are pretty out of favor, and their safety of principal is far more reliable over the long term. While shares look a bit expensive currently, the 3.5% yield and expected growth rates make JNJ a decent long term buy and hod candidate.
Covidien (COV) -- Covidien is a cheap alternative to an Abbott Labs (ABT) or even a JNJ. Trading at just 13X earnings, analysts expect COV to grow earnings at a 10% per year clip going forward. Cramer is bullish on COV, and we think it's cheap compared to its competition.
US Bancorp (USB) -- Another one of Buffett's long term holdings, US Bancorp is a name that has heftily outperformed the markets over the past twenty years, and have even delivered for investors during the financial crisis. Though shares briefly touched the single digits in 2008, today the stock is trading at $29 a share, up from $24 a share during the summer of 2008 before the crash in the major financial stocks. USB is still pretty cheap at 11.8X trailing earnings and for under 10 times forward earnings. With a dividend yield of 1.7%, USB doesn't deliver the same income stream as it did back in 2007, but the capital appreciation of the stock has more than made up for any missed income over that time period.
Weyerhauser (WY) -- Weyerhauser is a great company which is trading at a cheap multiple to its $600 million of free cash flow. We think lumber prices could start to tick up and that Chinese investors may eye US timberland in the future, driving land values and fattening the bottom line for companies in the sector. WY may not be dirt cheap on earnings, but at 20X free cash flow, or a 12 billion valuation Weyerhauser seems to me to be fairly priced. This gives us a 20% discount to intrinsic value and a nice yield on our investment.