Investors have just a finite amount of money to put to work. There are thousands of stocks to pick from. Can we narrow down our menu of possible choices while putting the odds in our favor?
Start with a list of only those companies that have a long-term track record of creating wealth for their shareholders. How do I define this very desirable attribute?
Share prices do not necessarily reflect short-term changes in the fundamental values of the underlying companies. Over time, though, they do tend to follow the changing trends in cash flow, book value, earnings and dividends (if applicable).
When present values of stocks go well below true asset values, they will recover. This process occurs via a variety of methods.
Share buybacks can take advantage of underpriced quotes. Corporate mergers and takeovers most commonly occur when economic realities are not being reflected.
Financial engineering (LBOs and debt-funded restructurings) can also be employed to arbitrage the differences in market capitalizations, ongoing business values and/or asset replacement values.
It would be hard to do badly if you simply hold onto these great corporations over time as they continue to accumulate assets and earnings power.
Overall market turmoil occasionally forces indices dramatically lower. This presents chances to buy these exceptional companies at remarkably reasonable prices.
All the stocks on the list in this, and my follow-up article, meet all the criteria listed earlier.
Some of those stocks are now a bit too pricey for me to buy at today's quotes. They should be put onto 'wish lists' to be purchased the next time a pullback makes them bargains again.
Buy-and-hold investors will likely do well by owning all these fine companies. Those willing to trade occasionally, when over- and under-valuations take place, should be able to outperform market indices even more substantially.
I have constructed my lists to allow for adequate diversification among different industry groups. The 26 firms (13 here and 13 more in part two) are by no means the only companies which meet my criteria.
I invite readers to share their own suggestions as to other stocks which should be included in any future lists of this nature.
It should be noted that September 25, 2002 - exactly 10 years ago - was near a low point for the broad market. It was thus a very favorable starting date when looking at 10-year returns. Today's valuations are not nearly as favorable as they were back then.
Even the worst of this group provided very acceptable annualized returns. The best were nothing short of spectacular. All thirteen provided good dividends along the way (already figured into the returns indicated in the chart).
The key takeaway is that companies that build value over time will also deliver adequate shareholder rewards. That's especially important in a ZIRP [Zero Interest Rate Policy] environment when fixed income is offering almost no chance to overcome inflation.
Limiting potential buys to these type of shares may cause you to miss the excitement generated by turnarounds and/or the hottest technology issues. It does, however, virtually guarantee you will do well.
Portfolios like the one shown provide adequate diversification along with the high-quality needed to sleep well at night.
Part Two of this series has another thirteen great choices for conservative, long-term investors.
Why chase higher-risk, less predictable equities when wonderful choices like these abound?
Disclosure: I am long BKE, BEN, SIAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Secondary Tickers: BKE,COST,CVS,EL,BEN,MCK,MCD,MKC,MON,NKE,SIAL,SYK