Many mutual fund managers crave stocks of companies with rapidly growing earnings. But such companies can hit potholes. Then the earnings slow, and the share prices collapse. For more reliable performance, stick with companies that deliver few surprises, says fund manager Stephen Goddard. He favors big companies that often increase sales and earnings at single-digit annual percentage rates. Because they rarely post eye-popping earnings gains, their stocks sell for modest price-earnings (P/E) ratios. Such shares rarely skyrocket, but they don’t drop much in downturns either.
Goddard aims to buy strong businesses that sell at discounts to their fair values — estimates of their intrinsic worth. He holds on to them for five years or longer, while, hopefully, the shares gradually rise. Goddard particularly likes companies that raise their dividends and buy back stock. That can push up stock prices over the long term. His favorites include…
Dominion Resources, Inc. (D). This regulated power producer services growing markets in Virginia and North Carolina. Regulators are permitting the company to enjoy steady earnings increases, and the stock pays an attractive dividend yield that has been 3.4% lately. Recent share price: $47.84.
Merck & Co., Inc. (MRK). Concerned that few drugs are being developed, investors have been shunning pharmaceutical stocks. But this giant has plenty of cash and will continue to report steady sales. Recent share price: $36.98.
Source: Stephen Goddard, portfolio manager of the AFBA Five Star Balanced Fund (AFSAX). It had annualized returns of 11% for the five years through May 31, about three percentage points above the Morningstar, Inc. average for moderate allocation funds.
