The market's been tottering for weeks now, caught between the ongoing euro malaise and lackluster growth and unemployment numbers in the United States. But some of the best companies around are still generating substantial wealth for investors and they're too discounted to let go.
So below I highlight five stocks that are just too cheap to sell and why you should hold onto them. I'll also highlight an Australian company that meets the same selection criteria and is too cheap not to buy.
Four reasons you must stay invested
It's been long demonstrated that value stocks outperform over time. The career of superinvestor Warren Buffett and other investors from the Graham school prove as much. Part of Buffett's success is also due to his unwillingness to sell dominant companies that are consistently profitable and that spin cash back to him in the form of dividends.
If you want to follow in his footsteps, it means holding onto strong businesses even in the face of stock market weakness and not letting the media fearmongers scare you out of your positions when the market's down. To keep you in your positions and to find new ones, focus on the following four qualities:
1. Consistent cash generator — Focus on businesses that generate cash in good times and bad by selling products that are in demand regardless of economic climate, and stay out of cyclicals. Stocks of businesses with good cash flow will be less volatile than their inconsistent peers, meaning you have less downside but still good upside.
2. Dividend payer — You don't get paid if you don't own dividend payers, so the reason to own them is straightforward. Use the dividend as a support to keep you in the stock. Even better, dividend stocks tend to outperform over time with less volatility. Also focus on stocks paying a rising dividend so that you're getting paid more every year.
3. Huge future opportunities — Is the business going to be more relevant in the future than it is today? Focus on the future opportunity instead of how the stock performs over the next day or week. This will also help you stay invested, and maybe even buy more, should the stock become even cheaper.
4. Cheap stock — Buying a stock on the cheap erases a lot of other investing mistakes and gives you an opportunity for the earnings multiple to expand and offers protection on the downside, too.
You don't have to have all these qualities in your stocks, but it's useful to have at least three. If I focused on any quality most, it would be cheap. So below I highlight five stocks that hit at least three of these criteria and why they're simply too cheap to sell.
5-Year Earnings Growth
5-Year Dividend Growth
|Philip Morris International(NYSE:PM)||15.2||4.6%||6.9%*||77.2%*|
|Ultra Petroleum (NYSE:UPL)||11.9||0%||7.4%||N/A|
Source: S&P Capital IQ. *Three-year growth rates, since the company was spun off in 2008.
Intel dominates its industry unlike almost any other company. While slowing growth in PC sales and the rise of the tablet computer have spooked some investors, longer-term investors can now acquire a blue chip stock at an outrageously low valuation that prices in almost no growth. And the ability to score such a high yield out of a blue chip is amazing; not that long ago, you could have had 4% from Intel, but the dividend track record suggests the payout will continue to grow in the future.
Microsoft looks very similar: outrageously low P/E that bakes in almost no growth, sizable dividend, and low double digit earnings and dividend growth over the last five years. While many investors are worried about how Microsoft will compete in the mobile phone and tablet worlds, this behemoth still cranks out the cash from its PC-related businesses. The future opportunities aren't as great as they were 20 years ago, but there's still plenty of room for Microsoft to expand.
Philip Morris is the most expensive stock on this list by P/E, but it has huge opportunity and consistency to balance out that price (which isn't even all that high). Since being spun off from Altria (NYSE:MO) nearly four years ago, the company has quickly boosted its payout, including a surprising 20% bump in the latest quarter. Unlike former parent Altria, which is confined to the U.S., Philip Morris can grow internationally and flat-out dominates the global tobacco market and will thrive as the middle class develops around the world.
AT&T trades at a multiple that prices in no growth, and the stock is only marginally higher than its 2008-2009 credit crisis lows. The company offers one of the highest (yet safe) dividends in the U.S. market. And while growth opportunities are not as large as they are for other companies here, you're not paying for it either. The cash cow nature of the business means dividends can grow over time.
Is there a better natural gas player than Ultra Petroleum? The company is the low-cost producer, which is exactly what you want to own when nat gas prices are low. That low price leads players such as SandRidge Energy (NYSE:SD) to shift production out of gas and into high-priced oil, helping to stabilise the price of natural gas. Ultra has developed just 6% of its land and has one of the savviest management teams in the industry. Plus, the stock trades for less than its financial crisis lows (amazingly!) despite sitting in a better competitive position. There's even an outside chance of a buyout from one of the supermajors.
Foolish bottom line
So those are five stocks that I think are just too cheap to sell, given their consistent track records and future opportunities. If you're intrigued by the possibility of scoring good long-term returns, but not yet investing internationally, then you should download our special free report The Motley Fool's Top Australian Stock For 2011-12. Click here, whilst it's still free and available.
By Jim Royal oringally published at fool.com. Authorised by Bruce Jackson.