Wealth Creators: Why Risk Buying Anything Else? Part Two

by: Paul Price

Investors have finite amounts 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 long-term track records of creating wealth for their shareholders. How do I define this very desirable attribute?

Share prices do not necessarily reflect short-term fluctuations 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 occurs via a variety of methods.

Share buybacks can take advantage of underpriced quotes. Corporate mergers and takeovers typically occur when economic realities are not being reflected.

Financial engineering (leveraged buyouts and debt-funded restructurings) can also be employed to arbitrage the differences in market capitalizations and replacement value.

It would be hard to do badly simply holding on to these great corporations over time as they continue to accumulate assets and earnings power.

Overall market turmoil should be welcomed as it occasionally forces the whole market lower. This brings us chances to buy truly exceptional companies at remarkably discounted prices.

All the stocks listed here (and in part one of these two articles) meet all the criteria listed. Some are too pricey for me to buy at today's quotes. These names 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 should be able to outperform market indices even more substantially.

I have divided up my lists in order to allow for adequate diversification among different industry groups. The 26 firms (from the two combined write-ups) are by no means the only qualifying companies.

I invite readers to share their own suggestions as to what other stocks should be included in any future lists of this nature.

If should be noted that the starting date of September 25, 2002 (exactly 10 years ago) was a relative low point in the market. That made it a very favorable starting date when looking at decade-long 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 spectacular. Nine of the thirteen provided dividends along the way (already figured into the returns indicated in the chart).

The key takeaway? Good companies build value over time. The best ones will deliver excellent shareholder rewards as well. Limiting your potential buys to these types of shares may cause you to miss the excitement generated by turnarounds and/or the hottest technology issues.

That said, it virtually guarantees you will do well over time.

Portfolios like these provide adequate diversification along with the high-quality needed to sleep well at night. Part One of this series showed thirteen other great choices for conservative, long-term investors.

Why chase higher-risk, less predictable equities when wonderful choices like these abound?

Disclosure: I am long COH, DE, ESRX, ORCL, POT, TMO, WAT. 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.