5 Best Stocks To Invest In For 2019
And why they’re actually good investments
|Written by Tom Yeung, CFA | CDFA|
Investment Advisor & Fund Manager, Jurnex Financial Advisors
It’s become extremely popular to invest in market tracking funds. Thanks to a 10-year stock market rally, any investment in the S&P 500 index would have tripled in value since 2009. There are many “best stocks to invest in” during bull markets.
Easy money, no effort? There’s something wrong with this picture…
With markets at fresh highs, blindly investing in the average market alone isn’t enough anymore. Especially for those worried about losing money. That’s because broad-market ETFs also include a number of speculative, unproven companies. Tesla, for instance, is on track to join the S&P 500. Yet many would balk at its high cash-burn rate and unproven business model. As of July 2019, it has only 8 months of cash left.
(Note: if you’re a Tesla fan, they DO make enviable automobiles. Investors should simply take issue at the company’s weak financial position… a level that even Apple never reached during its 1990’s nadir)
A better way to invest: core-and-sattelite
This method of investing has grown in popularity to help diversify risk.
- Invest ONE PART of your portfolio in a low-cost ETF
- Invest ANOTHER PART in individual high-quality companies.
This allows you to have both diversity and high-quality in your portfolio.
What do the best stocks to invest in look like?
This article focuses on #2 of the equation: what are good companies to invest in?
If you’re looking for some great examples, you come to the right place. In this article, will first briefly go over what makes a good investment. After that, will analyze five companies that my own fund is currently invested in; these are high-quality companies that I believe will perform well over the long-run. Finally, we’ll wrap it up to see how you can benefit from investing in the best stocks.
So before we get to the examples, let’s discuss what makes something one of the best stocks to invest in.
5 Properties Of The Best Stocks To Invest In
Investing is largely a mental game, where you need to stand by the courage of your convictions. Having a solidly built foundation will help you weather through periods of extreme uncertainty. And having predetermined rules will also tell you when to sell a company.
Ever since the days of the Buttonwood Tree (the first financial exchange in the US), there’s been no magic to good long-term investing. It just takes patience, conviction, and a good set of rules. Here are the five key criteria I tell all investors to keep in mind when looking for the best stocks to invest in.
1. Simple and understandable
Simple companies not only are easier to manage, but they’re easier for investors to detect problems early.
The failures of Enron/Worldcom in 2004 and AIG/Lehman in 2009 were made possible by the complexities of their businesses. Management at the four companies either 1. didn’t understand the risks or 2. knew about the risks but hid it from investors. A simple business means you can quickly see problems before they become major issues.
As for understandable: this comes to personal experience. Some people who work in medicine or health might keenly understand biotech companies. However, even regular people like you and me have our own specialties.
Sell-side analysts, for instance, spend millions trying to get insight into everything from apparel to retail. But if you like clothes shopping, you have them beat. It becomes a breeze for a fashionista to tell whether TJ Maxx or Gap is doing well.
2. Consistent operating history
Just like much else in life, consistency is key to company health. The best stocks to invest in all have reasonably long operating histories with proven management at the helm.
What do I consider a long history? It depends on the industry. Companies like banks and insurance companies tend to move very slowly, so you want at least 10 years of history. Poor lending habits only show up during financial crises, which by nature don’t happen very often. But by the time they happen, it’s too late to do anything.
For retail companies, 5-7 years is generally enough. You want to make sure the company isn’t selling into a short-term fad. Sketchers, for example, had an amazing 3-year run in 2012-15. Its stock multiplied 10-fold when middle-school kids started reviving the storied brand. The stock has since fallen by almost half.
Finally, software businesses and other B2B services might need just 3-years to prove themselves, especially those that run ‘sticky’ businesses where switching costs are extremely high.
What about inconsistent companies?
Turnarounds and longshots do make money occasionally. But over the long run, they tend to be poor investments. Only about 1 in 10 drugs in Phase I clinical trials make it to FDA approval. And the desk drawers of Wall Street offices are stuffed full of stock issues that have gone bankrupt long, long ago.
3. Favorable long-term prospects
Warren Buffett and MorningStar famously call these “moats”. I take a more direct term:
Companies with the ability to earn above-average returns for the next 10 to 20 years.
You want to find companies that have something special about them. Something that makes their products different from others, and all but guarantees they will do better than the average company.
Brands are an excellent example of this. Companies like Coca Cola and McDonald’s have an incredible power to draw people back in. Apparel companies like Gap and Urban Outfitters though? Not so much. Fashion is notoriously fickle.
Utilities are another great example. Traditional utilities like waterworks, telecom companies like AT&T, or even software companies like Microsoft. All of these companies can be considered de-facto monopolies of sorts. These are companies that make products that are all but impossible to switch away from.
Avoid companies that produce commodities: undifferentiated products that compete on price alone. Companies like these tend to do poorly over the long run. By their very nature, commodities are easy businesses to enter, so competition tends to be extremely keen.
4. Creates real financial value
For a company to generate financial value, it also usually must create economic value. Companies don’t become profitable unless they provide a useful service (or are a sanctioned monopoly). Google is an excellent example of a company that has created exceptional value from “organizing the world’s information”. The company generates around 14.3% return on invested capital even when including its “moonshot” projects.
What about value-destructive companies? Amazingly, probably 1/3 of all listed US companies destroy shareholder value. And most don’t even realize it.
That’s because it’s not enough for a company to be just profitable. They have to earn their cost of capital, else the shareholders aren’t being compensated for risk. In most cases, that means earning at least 5% back on investment.
Zombie companies: These are companies that earn so little money they can’t even cover interest payments, let alone cost of capital. According to Bank of America Merrill Lynch, around 13% of companies are zombies.
Value-destructive companies all have one thing in common: they destroy shareholder value over time. Even if a short-term investor might profit from trading the stock in and out, a long-term investor in a money-losing company will see their investment value dwindle.
5. Can be purchased at a discount
Finally, you want to find companies that can be purchased at a discount to their fair value. If a company has wonderful prospects, it could still be a bad investment if EVERYONE knew about it and bid the share price up to impossibly high levels.
The Japenese Property Bubble: The incredible Japanese property boom of the late 1980s, for example, valued Japanese real estate at 4 times that of the entire United States. That’s for a country of 1/25th the size of the US with less than half the population. While Tokyo real estate may still be valuable today, the excesses reached in the 1980s were so high that even 30 years later, investors have not yet recouped their original investments.
Reasonably-priced can still make fine investments. For high-quality, high-growth companies, paying fair value can still make investors money. That’s because of a simple formula:
Sustainable Growth Rate = (1 – Dividend Payout Ratio) * Return on Equity
Companies that maintain a high return on equity will consequently have a much higher sustainable growth rate. So high-earning companies at fair value today can still outperform over the long-run.
In general, however, you want to find companies that have not yet been “discovered” by the general market. It’s not necessary to buy the stocks at their very lows. One just has to buy them at a price that you know represents a discount to their future value.
5 Examples Of The Best Stocks To Invest In
Now that we have covered the five important characteristics of the best stocks to invest in, let’s see how to apply those criteria. I’ve chosen 5 companies from the Jurnex Growth Fund to illustrate.
1. Capital One (COF)
This is one of my favorite kinds of company to invest in. Capital One was spun off from Virginia-based Signet Financial Corp in 1994. Under its founder and current CEO, Richard Fairbank, the bank has steadily grown from a small credit card lender to a multi-state banking company.
It’s hard to miss their advertisements on TV touting their credit cards. But what’s even harder to miss? If you’ve ever stepped into a Capital One, you’ll instantly know you’re in a different type of bank – one that treats customers right both financially (giving high-interest rates on accounts) and personally (having staff who generally care). Few banks have this combination. First Republic Bank and (to a smaller extent: US Bank and TD Bank).
These qualities show up on their financial statements too. The company has kept a steady rate of growth, avoiding the siren’s call of aggressive growth that other national banks tried (and failed spectacularly) during the run-up to the 2008 financial crisis.
Why this is one of the best stocks to invest in
- Simple and understandable. Even though banking can become a complex business, Capital One has focused on just three key areas: credit cards, consumer lending, and commercial banking.
- Consistent operating history. The company only had two-quarters of losses during 2018, and these losses were made up within a year. Under Richard Fairbank’s stewardship, the company has resisted the temptation to grow more aggressively through extending subpar loans.
- Favorable long-term prospects. Credit cards are still a growing business and Capital One continues to slowly expand its footprint westward across the US.
- Creates real financial value. The company’s commitment to customers is reflected in its financials too. The bank currently earns a respectable 11.3% return on equity, a reasonably high return in the banking industry.
- Purchased for a discount. The company is expected to earn 11-12% return on equity going forward but trades at just 0.9x book value (rather than 1.1-1.2x). This mismatch means the stock is likely 15-20% under its true value.
2. Jones Lang Lasalle (JLL)
Jones Lang Lasalle is the second-largest property management company in the world, after #1 CBRE. The company has seen a boom in commercial real estate services since the 2008 financial crisis, and (along with CBRE) has been consolidating the market to create a one-stop-shop for real estate services.
These days, a multi-national company looking to expand internationally would be well-served by CBRE or Jones Lang Lasalle. Everything from leasing to property management can be serviced under one roof.
This is a relatively “boring” company that nevertheless can grow multiples over time. These are the high-quality wide-moat businesses that any investor should seek out.
Why this is one of the best stocks to invest in
- Simple and understandable. The company’s two primary businesses, commercial leasing and property management, are relatively simple to understand (even though commercial leasing is a cyclical business). The current CEO is winding down its more complex direct-investment fund.
- Consistent operating history. The company has generated strong operating cash flow for the past-7 years, averaging around $300-500 million per year. The amount is lumpy because of leasing trends but is otherwise healthy for a real estate service company.
- Favorable long-term prospects. Consolidation has helped JLL and CBRE become more powerful players, able to service multi-national businesses under a single banner.
- Creates real financial value. Brands and reputation are incredibly important in the B2B world. The company has leveraged this, earning 13.8% ROE over the past-5 years. This handily outperforms its peer group of 9.7%.
- Purchased for a discount. The company currently trades at just 11.8 times forward earnings, compared to 14.2x for its peer group. Fair value is probably closer to $7.2B market cap than its current $6.0B. Pricing is the one area where Jones Lang Lasalle has CBRE beat.
3. Alphabet/Google (GOOG)
Google commands an enviable position in the internet world today. While the majority of Google’s earnings still come from search, its vast intellectual property spans Maps, Android, Mail, Cloud and more.
It’s moonshot projects also house hidden intellectual property. For instance, Google has the most advanced technology in self-driving cars. Its nearest competitors are likely 5 to 7 years behind.
Unlike Apple, Google has also resisted the temptation to rest on its laurels. Company management continues to invest in new technologies while dominating the ones they are already in.
Why this is one of the best stocks to invest in
- Simple and understandable. Most people who use the internet will know what Google does. The company receives 63,000 search queries a second, controls 27% of the global email client market and has 2 billion users on its Android platform. The company’s moonshot projects are a little more difficult to understand but doesn’t make up a core part of the company’s business yet.
- Consistent operating history. Unlike other tech startups, Google has generated strong earnings since its listing in 2004. The company has consistently grown its business relentlessly improved its technologies.
- Favorable long-term prospects. The internet still has a long way to go, and Google has been on the forefront in shaping that future. The company foresaw the rise of mobile computing and is now pushing hard into cloud computing too.
- Creates real financial value. It’s impossible to ignore Google’s influence on the world’s well-being. Few can now remember the days before Google’s search engine when spamming sites with keywords still worked. Google has since become one of the most consistently profitable companies in the world.
- Purchased for a discount. Despite its pole position, Google is still valued at just 16.6 times cash flow. This is higher than the 13.1 times cash flow of the average US stock (or 15.6 times for tech). But Google is no ordinary company, with a 16.3% return on equity. So even though it trades higher, Google remains a top company in the Jurnex Growth Portfolio.
4. Yum China (YUMC)
Proof that you don’t need to invest only in the United States. Yum China was spun out of Yum! Brands in 2016 and owns the KFC and Pizza Huts in Mainland China.
Yum! Brands was an early mover into China, which remains a region where KFCs dominate McDonald’s. The company is also still growing, adding several hundred stores every year. The company hasn’t stopped either, launching test brands to add more diversity to its restaurants.
Like fast food in the United States, fast food in China is a wide-moat business. As the country becomes wealthier, KFC will have a chance to franchise out restaurants, earning even higher returns going forward.
Why this is one of the best stocks to invest in
- Simple and understandable. KFC and Pizza Hut are as simple as businesses come. The China-based business pays royalties to its parent company. But because Yum China owns close to 100% of their stores (i.e. minimal franchising) its financial statements are easy to read.
- Consistent operating history. The company has been in China for over a quarter-century. So despite just 3 years of financial history since its spinoff, it’s operational history is lengthy. The company is run by industry veteran Joey Wat who was promoted from her COO role.
- Favorable long-term prospects. As the Chinese economy continues to modernize, the demand for fast food will likely increase. KFC has done a remarkable job in localizing its menu to Chinese tastes and continues to do so with new brands such as COFFii & Joy. (alert readers may have noticed that the photo in this post is of KFC french fries… a menu item not offered in the United States).
- Creates real financial value. The company generates massive returns on equity of 21.1%, and return on assets of 11.0% (compared to sector median of 12.2% and 5.4% respectively). These high numbers are only possible in wide-moat businesses, which Yum China happily operates in.
- Purchased for a discount. I find the company at reasonable, if not fair value, of 27.6 times forward earnings and 16.1 times cash flow. Given the massive possibility for franchising (where the company sells stores to third parties), the company still has a great deal of value to unlock.
5. Borg Warner (BWA)
Even a little bit of domain knowledge goes a long way.
Most people haven’t heard of Borg Warner before. But if you own a car, you might be using the product every day. Borg Warner is the number one producer of turbochargers in the world. These are small devices car manufacturers attach to their engines to make them more fuel-efficient at low speeds.
Technology: at high speeds, a car’s movement pushes air into its engine. The extra oxygen makes fuel burning more efficient. At low speeds, however, you need a turbocharger to pump air into the engine compartment. And Borg Warner makes some of the best turbochargers in the world.
Yet the company isn’t standing still either. Sensing a shift towards electric cars, the company has shifted focus towards making the drivetrain for electric vehicles as well. This is a forward-looking company that keeps technology as its #1 concern.
Why this is one of the best stocks to invest in
- Simple and understandable. Once you understand what a turbocharger does, Borg Warner’s business becomes simple to comprehend. They work on long-term contracts with auto manufacturers such as Ford and Renault, and so their business is relatively stable.
- Consistent operating history. The company only lost money in 4 quarters in 2008, recouping losses within 1.5 years. An incredible feat for a company working in the auto industry. (Remember that GM and Chrysler had to get government bailouts, and Ford barely squeaked by).
- Favorable long-term prospects. Emission standards in the US and EU continue to tighten on a predetermined schedule, and Borg Warner stands to benefit as demand for fuel-efficiency continues to rise. Investors should continue to monitor for incoming competitors, however.
- Creates real financial value. The company is incredibly profitable, earning a 23.4% return on equity, compared to a sector average of 12.2%. Borg Warner’s focus on technology has vaulted them far above competitors.
- Purchased for a discount. The company is priced at just 9.8 times forward earnings and 8.1 times cash flow. The reason for its cheapness is twofold: a concern over the global economy (and thus automobile demand) and competition in turbochargers. Nevertheless, Borg Warner remains one of the strongest auto parts companies in the world.
So there you have it. Five examples of the best stocks to invest in.
I caution people from overcomplicating stock investing. As long as you follow these 5 principals for stock investment, it’s hard to go wrong.
What’s difficult is having the conviction to stand your ground, even as people around you are losing their heads over the next fad investment. (Bitcoin redux, perhaps?).
The only thing harder than losing money is to see your neighbor making oodles of it (especially when there’s no effort involved whatsoever).
My investment philosophy seeks to counter such follies. There’s enough of such folly on Wall Street already.
Where to find more resources
If you’re looking to revamp your stock portfolio, there’s no better time than now. All it takes is a phone call.
That’s because I’ve invested client money for over a decade in the same old-fashioned way: seek out great companies in good industries, that can be purchased at a discount to their fair value. Sounds too simple to be true? Give me a call today and I’ll show you that it’s still possible after all these years.
About Jurnex Financial Advisors
At Jurnex Financial Advisors, we have the securities backing of Charles Schwab. Yet we retain our operational independence from any third party. This means you can have the confidence your money is safe with one of America’s best brokerages and still receive knowledge and advice from an independent firm focused on YOU.
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