Eddy Elfenbein
Eddy Elfenbein is manager of the AdvisorShares Focused Equity ETF (CWS), whose five-year annualized return of 14.5% ranks in the top 7% of its category. He is based in Washington, DC. AdvisorShares.com/etfs/cws
More than 5,000 stocks trade on US exchanges—but there are only a few dozen truly great businesses. These rare companies are the kind of long-term investments that Warren Buffet always talks about. They have whip-smart management teams that put shareholders first…bullet-proof balance sheets…a dominant position in their market niche or sector…and profits that continue to compound year after year and decade after decade.
Challenge for investors: These stocks are well-known, so they rarely sell for cheap. That’s why professional investors create a watch list. They select a handful of companies they would love to own, determine a share price that reflects an attractive valuation…and then they wait. It can take months, even years, for a stock on a watch list to drop to the right price—but it happens eventually, sometimes at the bottom of a bear market, other times when the company faces a temporary crisis or endures a period of lackluster earnings.
To help you create your own watch list, Bottom Line Personal spoke to four of some of the most disciplined and successful investors in the country to find out what companies constitute their dream long-term investments…and the prices it would take for these professionals to pull the trigger…
List no more than 10 companies. This forces you to be very disciplined and focused on great businesses, not just collecting interesting or nice-to-have candidates. Having only 10 stocks to watch also makes it easier to check up on each company periodically.
Tailor your list to your own needs. There are high-quality companies in every sector and with different levels of volatility. Examples: If you depend on dividends, you may want to follow high-yielding energy stocks. If you have a tech-heavy portfolio, you may seek balance with low-volatility consumer-goods stocks.
Set up automatic alerts with your brokerage firm so you get a text or email when a stock on your list nears your trigger price.
Remember—washtubs, not teaspoons. Warren Buffett once advised, “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold…it’s imperative that we rush outdoors carrying washtubs, not teaspoons.” In other words, when the stock is very undervalued, buy as much as you can.
What’s on my watch list: World-class brands whose price-to-earnings ratios (P/Es), a common measurement of valuation, have fallen to 15 or lower.
Alphabet (GOOG). Recent share price: $155.54. Buy at: $150. The company owns many of the world’s most dominant and lucrative Internet- and mobile-based properties including Gmail, Google Chrome, Android, YouTube and Google Search, which controls over 90% of the market for Internet search worldwide. These services generate a staggering amount of revenue every day—nearly $1 billion. Alphabet also is a leading beneficiary of artificial intelligence, using it to increase the efficiency of online ads and expand its Google Cloud services.
Issues to watch for: This past August, Alphabet lost a landmark antitrust lawsuit in Federal court—a judge concluded that the company illegally stifled competition in the online search market. Appeals will likely take years, but there is the risk that Alphabet would have to make changes to Google Search.
What’s on my watch list: Dividend-paying blue-chips whose yields are at or near historic highs. Hint: That’s often a reliable sign that share prices are undervalued.
AFLAC (AFL). Recent share price: $107.97. Buy at: $50. Most investors know this insurer’s light-hearted TV ad featuring a duck mascot, who says “Aflac” instead of “quack.” The company provides more than 50 million consumers in the US and Japan with “supplemental” health insurance through employers. This additional insurance pays for uncovered costs for accidents, dental and vision care, short-term disability and cancer. AFLAC has increased its dividend for 41 consecutive years. The current yield is just 1.8%. The stock price would need to fall about 54% for me to invest. It was at that level back in March 2021.
Issues to watch: AFLAC is a slow-grower. It has saturated the Japanese market, from which it earns 70% of annual revenues, so it is depending upon expanding supplemental insurance products in the US.
McDonald’s Corp. (MCD). Recent share price: $292.35. Buy at: $190. The iconic restaurant owner-operator is the world’s largest chain with more than 42,000 stores and annual sales totaling $130 billion. What makes McDonald’s a great, high profit-margin investment is that it actually is a real-estate company that sells hamburgers and fries on the side. McDonald’s owns just 5% of its restaurants. The rest are owned by franchisees who pay the company rental fees and a royalty of 4% to 5% on all sales. The fast-food giant’s cash flow is so strong that it has raised its annual dividend payment 47 years in a row. The current yield is 2.3%. The share price has to drop 35% before I consider the stock attractively valued.
Issues to watch: Commodity and wage inflation could slow the opening of new stores, which has happened in markets like California.
What’s on my watch list: High-yielding energy companies that rise above the volatile ups and downs of oil and natural-gas prices.
Enterprise Products Partners (EPD). Recent share price: $28.83. Buy at: $23. The company is an energy middleman. It transports oil, natural gas and natural-gas liquids such as propane and butane through more than 50,000 miles of transmission pipeline from major shale oil basins to Gulf Coast processing plants and facilities for storage and overseas export. The company is a favorite of conservative investors because it is relatively insulated from swings in oil prices thanks to long-term, fixed-fee contracts. Plus, it is structured as a master limited partnership and avoids corporate taxes by distributing almost all of its income to shareholders. Recent dividend yield: 7.3%. The stock is about 21% above my trigger price.
Issues to watch: Enterprise Products Partners is counting on the promise of large natural-liquid gas exports to China and India in the future to justify multibillion-dollar investments in its export facilities.
ExxonMobil Corp. (XOM). Recent share price: $111.23. Buy at: $93. Every day, the integrated oil-and-gas giant produces 2.4 million barrels of liquids and 7.7 billion cubic feet of natural gas, as well as operating as one of the world’s largest processing plants for specialty chemicals. Unlike many of its peers, ExxonMobil chose to invest billions of dollars in new oil-exploration projects over the past decade instead of developing renewable-power businesses. That initially hurt the stock price. The company was even removed from the Dow Jones Industrial Average Index after nearly a century. But it looks like a smart move now because the switch to alternative energy will take decades and the demand for fossil fuels will remain strong. The stock recently yielded 3.4%, and the company has hiked its annual dividend for 41 consecutive years. The stock is about 17% above my ideal price.
Issues to watch: If oil demand declines sooner than expected in the coming years, Exxon’s lack of investment in alternative energy could cause it to fall behind other major energy companies.
What’s on my watch list: Steady Eddies that beat the long-term performance of the S&P 500 index.
Church & Dwight Co. (CHD). Recent price: $103.55. Buy at: $90. Don’t underestimate the investment appeal of baking soda and condoms. Church & Dwight isn’t a familiar name, but you know its best-selling household brands including Arm & Hammer, OxiClean, WaterPik and Trojan. The company has a knack for making profitable acquisitions and a history of innovation. That has produced an annualized stock return of 14.6% over the past 15 years versus 14.02% for the S&P 500 index. At the same time, the stock has been two-thirds less volatile than the index. The stock shares were recently about 13% above my trigger price.
Issues to watch: Church & Dwight could be vulnerable to high inflation in the future because stretched consumers tend to switch to competitors’ cheaper products.
Ross Stores (ROST). Recent share price: $152.68. Buy at: $125. As one of the leading discount apparel chains with more than 2,000 outlets, Ross breaks all the rules of traditional retail. Its Dress for Less stores, filled with liquidated name-brand merchandise, are messy, disorganized and change constantly. But the company’s balance sheet is pristine. And customers love the rock-bottom prices and treasure-hunting thrill of not knowing what they’ll find. The stock has returned 19% annualized since 2009. The stock price was recently about 18% above my trigger price.
Issues to watch: With thousands of existing stores, growth may slow at Ross as the off-price market becomes saturated.
*Performance figures are as of September 12, 2024, courtesy of Morningstar, Inc.
