So Here's What You Missed...

 

George recently recommended these long-term holdings and outlined the merits of well-informed investor patience

 

Beware an Itchy Trigger Finger

We recently came across some statistics that we found quite surprising and, frankly, quite scary.  According to the New York Stock Exchange, the average holding period for a stock in 1960 was a little more than eight years. By 1980 it had dropped to a little less than three years and by 2000 to a little more than a year. By 2010 the average holding period was down to about six months.

We’ve been hearing for a while that “buy and hold” is dead, but we disagree--at least if you want to make money from your investments. We strongly recommend being patient with your stocks for several reasons.

First of all, very few people, if any, are consistently good at picking the right time to get into and out of a stock. It is hard enough to find a good stock to own and almost impossible to pick just the right time to buy and sell it. You are much more likely to make money by identifying stocks with good potential and then giving them plenty of time to reach that potential. Computers might be able to execute a lot of short-term trades and actually make money at it, but it is very difficult for humans to do.

Another factor contributing to the difficulty in making money at short-term trading is transaction costs. Every time you get into or out of a stock you pay a brokerage commission.  And brokerage commissions are only part of the cost of making a trade. There is always a “spread” between the bid price (what someone is willing to pay for a stock) and the asking price (where someone is willing to sell the stock).  Moreover, if the stock is not actively traded, even a small transaction can adversely affect the price--i.e. someone trying to sell a stock will push the price down and a buyer will push the price up. The more you trade, the more all of these costs add up and reduce your return.

Next, taxes can have a significant effect on your profits. If you hold a stock for more than a year before selling, your gains will be taxed as long-term capital gains at a maximum federal rate of 15%. If you sell in one year or less, your gains are taxed at short-term rates, which can be as high as 35% at the federal level. That’s a big difference in the amount of your profits you must share with Uncle Sam. And many states get their piece too.

Finally, many short-term traders miss out on the beneficial effects of dividends. Over the long haul, dividends can make up a substantial portion of your profits on many stocks. For example, since 1926 dividends have made up approximately one third of the total return on the stocks in the S&P 500. For some ten-year periods, it was more than half.

With these things in mind, we went looking for some stocks that could be good long-term holdings. All of the stocks discussed below are solid companies with strong positions in their respective markets. They all pay dividends above 3.0%. And they are generally out of favor with investors right now, making them look cheap to us. 

Turnarounds with Dividends While you Wait

Company

Symbol

Recent
Price

5-Year Range

Market Cap. Mil.

Price to Sales

Dividend Yield

Applied Materials*

AMAT

11.63

21.99-7.80

14,620

1.58

3.20

CA

CA

25.89

28.11-12.00

12,140

2.52

3.90

Dow Chemical

DOW

29.26

47.43-5.89

35,060

0.60

4.30

General Dynamics

GD

65.76

95.13-35.28

23,200

0.71

3.10

Intel

INTC

25.00

29.27-12.05

125,080

2.28

3.60

Nucor

NUE

38.30

83.56-25.25

12,160

0.60

3.80

Pfizer*

PFE

23.85

25.71-11.62

178,150

2.75

3.70

Republic Services

RSG

27.71

36.52-15.05

10,120

1.24

3.40

Raytheon

RTN

56.23

67.49-33.20

18,670

0.76

3.60

Walgreen

WAG

35.40

48.09-21.28

30,390

0.42

3.10

*Previous TL Recommendation 

Applied Materials is the largest supplier of semiconductor manufacturing equipment. The semiconductor sector will always be cyclical, but Applied has the resources to make strategic acquisitions, allowing it to capture market share during downturns. An aggressive stock buyback program and the solid dividend should enhance shareholder value.

CA, formerly CA Technologies, is a major information technology services provider. It survived a maze of legal problems in the early 2000’s, and is now working to stay at the forefront of the IT sector.  CA has a robust product development pipeline, a worldwide presence and strong strategic partnerships. The financials are solid; debt has been reduced by 50% over the last four years and there is an ongoing stock repurchase plan. 

Dow Chemical is the nation’s largest chemical company. The product line is very diverse, and about two thirds of sales come from outside North America.  Investor concerns about a worldwide economic slowdown have dampened the stock performance recently, but we believe that the current stock price adequately discounts this risk. 

General Dynamics has long been a leading defense contractor supplying a range of products and services ranging from land- and sea-based combat vehicles to information systems and other advanced technologies. The company is also one of the largest suppliers of corporate jets via its Gulfstream product line. The uncertainty about possible defense department cuts has led to historically low valuations, providing a good entry point for patient investors.

Intel is the largest chip maker in the world, and it still commands some 80% of the PC market.  Intel needs to expand its presence in mobile devices, notebook/ultrabook PCs and server products, but if history is any guide, it will be successful in doing so. The financials are outstanding, and the dividend is unusually large for a technology leader.

Nucor pioneered the mini-mill steel industry, a smaller-scale steel production process that uses scrap steel as the main raw material. Management has a good reputation for both operational efficiency and financial conservatism. Economic concerns are currently a two-edged sword: revenue forecasts are soft, but on the other hand, raw material (scrap) prices are low. Nucor is well positioned to profit when global economic conditions improve.

Pfizer is the world’s largest drug company. The expiration of patent protection on Lipitor and several other drugs has caused many investors to shy away from the stock. But Pfizer’s pipeline of potential new drugs is quite robust, with 31 compounds in registration or Phase 3 development. To sharpen its focus on its core markets, Pfizer is selling several non-core units. Moreover, the company has a strong and growing presence in emerging markets. 

Republic Services emerged from the 2008 purchase of Allied Waste as one of the largest solid waste disposal/recyclers in North America. It is using smaller acquisitions to enhance its reach, especially in faster growing geographic regions. The company is transitioning to natural-gas vehicles to reduce future costs. Cascade Investments, Bill Gates’ investment firm, recently upped its holdings to over 21%.

Raytheon is a leading defense contractor specializing in missiles, missile defense and electronics. While U.S. government budget cuts would almost certainly affect the company, its product offering is quite diversified, and it is seeing growing international demand as tensions escalate in different parts of the world.  Management has been proactive in managing costs, and so any upside surprises in defense spending could result in significant earnings growth.

Walgreen is the largest U.S. drug retailer and distributor. A contract dispute with prescription manager Express Scripts was resolved in July, but it may take Walgreen a while to regain the customers it lost as a result of the dispute. The recently announced acquisition of a 45% stake interest in Alliance Boots will greatly expand the Walgreen’s global reach in the long run, but there may be some integration issues in the shorter term. Nonetheless, we view Walgreen as an attractive long-term holding.

 

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