defines "stalwart" as "capable of exerting considerable effort or of withstanding considerable stress or hardship." According to
, its Old English precedent translates to serviceable, and probably originally meant "worth stealing."
Peter Lynch didn't have etymology in mind when he discussed "stalwart stocks" in the 1980s, but his phrase is apt in all its meanings. Given the current market, individual investors might want to get associated with stalwart stocks as well.
Stalwarts, according to the former Fidelity Magellan skipper, are bigger companies that are still able to post annual growth rates around 10% to 12%. These stocks tend to offer downside protection during recessions. The key to a decent return is buying them when they are cheap -- "worth stealing." They might not double, but you can aim for a double-digit return over a six-month to two-year period.
"These aren't the blow-out stocks," said David Dreman, the value-conscious manager of the
Scudder Dreman High Return Equity fund. "In a market waiting for news, the Iraq overlay drowns out most themes -- it's not much of a value market or a growth market. If you find solid companies with good finances and a decent yield, that's a better place to be than money market funds."
In the 1980s, Lynch included among his stalwarts
Procter & Gamble
. Some of the old standards -- McDonald's, especially -- have many red flags these days. Others -- such as Colgate-Palmolive -- aren't that cheap anymore.
What should investors look for when seeking stalwarts for 2003? "You should look for better-than-average businesses at a below-average price," said Donald Yacktman, manager of the
Here are a few solid candidates whose earnings should keep growing and whose stocks look cheap. But first, one more point: Lynch rotated his stalwarts, selling them off after a 30% to 50% gain and scooping up new ones on the cheap. Most companies that fit this bill can be held for the long run, too -- just make sure the reasons you like the company remain intact.
MO Dividends, Please
, the company formerly known as Philip Morris, has a few clouds swirling around it. Competition from generic brands and increased marketing are pinching the domestic business, leading the company to project 2003 per-share earnings of $4.60 to $4.70 -- essentially flat to up 2%. The stock has been beaten down 36% to $37 and change from $57.79 last summer.
Now the good news: Altria shares sport a price-to-earnings multiple of 7 -- at the low end of its historical range. Meantime, the dividend yield stands at 6.8%. While this year's growth is negligible, Altria has averaged annual earnings growth of 16.6% the past five years -- once it gets past its shorter-term hurdles, the company should return to form. Meantime, it's a classic low-risk holding, sporting a beta of 0.24 (a beta of 1 means a level of risk equal with the market, based on past volatility).
"It is cheap at these levels -- we own it," said Mark Haefele, a
columnist and portfolio manager at Boston-based Sonic Capital. "Altria returns money to shareholders in the form of share buybacks and dividends. So even if the business was stationary, the total return to shareholders is great."
"There's about $24 of Kraft
84%-owned by Altria in every share, and Kraft is about one-third of total earnings," said Dreman, whose fund has nearly 10% of its assets in Altria, according to Morningstar. "Investors are assigning a negative number to Philip Morris' domestic earnings."
Given its impressive earnings growth rate in the past decade, it might be unfair to call
a stalwart. The government-sponsored mortgage lender has posted five-year average annual earnings growth of 33%.
Why, with the company's steady record of impressive growth, does Freddie Mac's stock sport a P/E of 6.9? A cocktail of issues that resemble red flags have sent the stock tumbling. Most recently was the news that Freddie Mac would be restating its earnings going back three years.
The uncertainty -- coupled with the complexity of Freddie's business and concerns about the inevitable slowdown in the mortgage-refinancing market -- has kept investors away. "Freddie has been hit because of the restatement -- but they were conservative in how they recognized things," said Haefele, who owns the stock.
The restatement will actually increase previous earnings, which potentially could pinch future growth if earnings management becomes more difficult for Freddie.
Nonetheless, even if earnings growth steadies at low double-digits, Freddie Mac is a consistent grower whose stock is inexpensive. "It's so cheap relative to its peers," says Dreman, who also holds a stake in the company.
The Real Big Mac
The big caveat for long-term investors: Freddie Mac may not pass a tenet of Buffettology: If you don't understand what the company does, you shouldn't invest in it. The government-sponsored entities, or GSEs, have come under fire for not providing adequate disclosure of their operational performance. The new rules governing disclosure by Freddie have been a step forward, but they have also sown confusion. "Ultimately, further disclosure will only help show that Freddie has been far more conservative and is doing much better than Fannie Mae," Haefele said.
There's one last thing in the company's favor that sticks in the craw of many rivals: Unlike other lenders, Freddie enjoys the protection of its former parent the federal government. Talk about downside protection.
A Different Home
is a new arrival in the stalwart category. The well-run company has had some operation glitches that put the stock at its cheapest level in years.
Home Depot dazzled investors in the 1990s with its exponential growth -- the home-improvement behemoth managed 23% earnings growth the past five years. The stock has lost more than half its value during the past year as it became clear that the company's salad days of growth were behind it. Fierce competition from
has hurt as well.
From the Moon to the Earth
Currently, Big Orange -- down to $21.84 -- sports a P/E of about 14 and earnings are projected to increased by about 10% to 14% this year. "They are improving their operations, and even as they stumble along earnings should be up by double digits," Dreman said. While Jim Cramer and others have said that it may be a little early to buy into the Home Depot recovery story, the company's whistle-clean balance sheet and strong management should inspire some confidence.
Why you have to make your own decision whether Home Depot looks good right now, some interesting folks have been buying lately: Legg Mason Value Trust skipper and longtime market-beater Bill Miller and, more importantly, several Home Depot insiders.
Drums Along the Mohawk
, with about $3.3 billion in market capitalization, may be a little small to be a stalwart. But a history of steady growth, excellent management and a recent dip in the stock price make the carpet-and-tile company a worthy candidate.
Earlier this month, the stock took a hit after the company warned that first-quarter earnings would be lower as consumers and businesses defer purchases amid geopolitical uncertainty and weak consumer confidence. Mohawk, which had posted earnings growth averaging 29% the past five years, forecast earnings of about 7% for 2003.
The forecast -- short-term in nature -- scared off some on Wall Street, making the stock more of a bargain. "This is a case where an outstanding, conservative management team is giving the worst-case scenario in their guidance," said Rich Eisinger, co-manager of the
Mosaic Mid-Cap fund. "It's a good opportunity to buy a very high-quality company." (Eisinger does a stellar job running the largely unsung fund; check back for Monday's 10 Questions to hear more on where his Buffett-like approach is leading him.)
Magic Carpet Ride
The stock, trading at $49 and change, sports a P/E below 12.
I'm not sure if Peter Lynch would agree with my four candidates, but I imagine he would concur that finding stalwarts in this market is a tall order. "It seems like any stock can lose 15% in a month these days," Haefele said.
"Peter Lynch never invested in a market like this," joked Dreman.
In my research and in talking with money managers, a few other low-price stalwart contenders cropped up, among them: British-based
, original stalwart Bristol-Myers, giant
, former fast-grower
Individuals looking for stalwarts should make sure they do their homework before laying their money down. They could do worse than picking up a copy of
One Up on Wall Street
, which includes Lynch's theories on investing.
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