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A Conservative Play For A Turbulent Market



October 08, 2011 – Comments (0) | RELATED TICKERS: ABT , JNJ , GE

As we all know, the global markets have been (to put it euphemistically) struggling over these past few months, as the S&P 500 has flirted with official “bear market” status—a term reserved for when a market falls 20% or more from its peak—and major global indices like the MSCI All-Country World Index have already met that ominous definition.

The lack of confidence in the domestic economy, political process, and the European financial system as a whole has some investors wondering if their mattresses aren’t better places for their money than markets. And given that we’re in the most tumultuous financial landscape since the Great Depression, I don’t blame em!

That said, in my humble opinion, there are some very appealing stocks with favorable risk/reward opportunities in the midst of all this anxiety, while mattresses, as far as investment vehicles are concerned, continue to disappoint. For the investor concerned about minimizing volatility, mature companies with big dividends offer the ability to preserve capital and generate income. I’ve taken the time to outline one such "conservative" play in particular that I believe will thrive, both in the short-term and over a longer time horizon.

No one knows how rough the Baby Boomers have had it over the past few years better than Baby Boomers themselves. Many of them have seen the hard-earned money they saved up for retirement erode before their very eyes; millions now plan on working a few years longer than they had in mind before they bow out of the workforce. Abbott Laboratories (ABT) is a perfect investment for these wary members of that storied generation. (Though I still think other generations should consider it too!)

Although I hesitate to compare ABT to a mattress that pays you to sit on it (or rather, to sleep on it), ABT is like a mattress that pays you to sleep on it. A healthcare company with an $80 billion market cap, a 3.7% dividend, and international exposure that includes the large, emerging market of India, Abbott is well-situated for both income and growth. Best of all, though, is the fact that the healthcare industry is poised for big profits in the years to come as an aging population drives demand for more healthcare. As a matter of fact, investments in healthcare and healthcare-related companies can be great hedges for the rising medical costs faced by these older investors.

ABT has a P/E of just under 16, which is an attractive multiple when you consider that even in the bear market of 2008 they traded at an average P/E of over 18 and saw a steadily-increasing Net Profit Margin, not to mention the fact that their Most Recent Quarter diluted EPS rose 48% YoY; to cap it all off, Barron’s has praised their promising pipeline, called their CEO one of the “world’s best,” and aggressive cost-cutting maneuvers promise to boost the bottom line moving forward. With projected FY ’12 EPS of $5.02 per share, if Abbott were to trade at just 13x earnings at the end of 2012, the stock would be worth over $65—a 26% premium over Thursday’s close at $51.53. Keep in mind, a 13x multiple is absurdly low—a deep discount to the industry’s average P/E of 16.8, and a valuation that ABT only broached briefly in recent times, during the depths of the 2009 market lows. Did I mention it also has a 3.7% dividend?

Abbott Labs is a great investment opportunity for the conservative investor sick of wild swings in prices. If you don’t find ABT attractive, even larger companies that stand little chance of faltering aren’t hard to find. Johnson & Johnson (JNJ) is another option within the healthcare industry, GE (GE) is an alternative possibility as a global, widely-diversified conglomerate, and Microsoft (MSFT) is a technology cash cow that looks to be a staple in the industry for years to come. All three offer above-average dividends and should help reduce that inevitable but gut-wrenching aspect of investments that we call volatility.

Note: The author owns January 2013 Call options in ABT and JNJ. 


P/E and other various company-specific info taken from stock price history and company 10-Ks and 10-Qs 

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