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Investing For Pessimists

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September 02, 2016 – Comments (0) | RELATED TICKERS: AWK , HCP , CTRE

We don’t all see the world the same way. Whether by life circumstance or personality, some people are simply more “cautious” about the future than others. And that’s okay. Between terrorism, disease, flooding, wildfires, and a host of other uncertainties there is certainly plenty to be down about. But when it comes to saving and investing, the worst thing you can do is stuff your life savings under a mattress or bury it in the backyard. Barring a total disaster such as theft, fire, or flood (or any number of other bad endings), money that isn’t earning interest is instead losing value, and rather quickly. 

While the Federal Reserve tries to hold inflation (the rate at which the cost of goods and services increase) at a steady 2% annually, it’s not an exact science and the dollar can fluctuate in value with a surprising degree of volatility. While the US dollar is strong right now (as compared to most foreign currencies), the fact remains that $100 today will buy what $55 bought back in 1990. That equates to a 45% loss of value in about a quarter century. 

Suppose you had $1 million dollars in cash and you hid it under your bed for 25 years, during which time the US experienced moderate annual inflation growth of 2%. At the end of the 25 years, your $1 million dollars would be WORTH just $609,756 in actual purchasing power. Nearly $400,000 gone - just like that.

How do you combat the ravages of inflation, you ask? Certainly not via CD’s, savings accounts, or bonds – all of which garner less than 3% as of this writing. Instead, you should be investing a sizable portion of your assets in vehicles whose growth will significantly outpace inflation. It’s surprisingly not that difficult, with many stocks averaging double-digit returns year-after-year for decades at a time. It’s never too late to start investing, so let’s talk about some options that might resonate among those with a gloomier outlook on the 21st century.

Everybody Drinks

Water is a necessity of life. Some would argue that alcohol is as well. As luck would have it you can invest in both!

American Water Works (NYSE:AWK) is a publicly-traded utility company that provides drinking water and other water-based services for 15 million people throughout 47 US states as well as Canada. They are the largest company in the water industry, as well as the most geographically diverse. With a market cap of $13.2B they are a titan among their peers, frequently growing by acquiring smaller players in close proximity to their own existing operations. While AWK’s valuation has seen a run-up over the past year and currently sits at a somewhat elevated 26.82 P/E ratio, the company is very profitable and expects to continue growing earnings-per-share at a 7% to 10% compounded annual rate through 2020. AWK also pays a 2% dividend, which should curtail the effects of inflation all by itself, to say nothing of the capital appreciation of the stock itself, which has more than doubled in the past 4 years. 

If your vision of the future includes scarce water resources across the US, American Water Works is well-positioned to profit from the supply-and-demand driven economics of this invaluable resource.

Anheuser-Busch InBev (NYSE: BUD) is of course well known to nearly everyone on the planet – if not by name than certainly by reputation. Corona, Bud, Stella Artois, Michelob, and Shock Top (my personal fave) are just some of the brands under the BUD umbrella.

AB InBev presently has 46% market share in the United States and 20% worldwide.  In October of this year if all goes well, BUD will be merging with SABMiller to form a massive global beer brewing behemoth commanding 30% worldwide market share. That leaves them well-positioned to grow revenue and profits for decades to come, with 10%-12% annual returns highly probable. 

With margins of 38% and a market cap of $200 billion BUD is already the envy of the industry. Earnings per share currently sit at $4.96 and should continue to climb for many years. BUD also pays a nice dividend of 2.6%.

During the Great Recession of 2008-2009 alcohol consumption held steady, for reasons that are fairly self-evident. It might make sense to invest in a company that is likely to survive – and thrive – in the best AND worst of times.

Lawlessness Will Increase

Taser International  (NASDAQ:TASR) is best known for their non-lethal stun guns, used by law enforcement the world over. They have recently transitioned into an exciting new space that – while not yet profitable – is positioned to drive significant revenue growth AND profits for the long term. That space is body cameras and video cloud storage for law enforcement. Subscriptions to Taser’s cloud site Evidence.com grew by 135% year-over-year for the second quarter of 2016. Sales revenue grew nearly 26%, to $58.8 million.

Investors are excited about the potential of this new business line and have bid the stock up in response. It currently sports a lofty P/E of 108, so now may not be the best time to plow all your mattress-money into this company. Either wait for a price correction to pick up shares, or use dollar-cost averaging to purchase shares at regular intervals throughout the next few years.

Smith & Wesson (NASDAQ:SWHC) is a name that needs no introduction. Known for fine firearms, they have recently ventured into sporting goods and accessories to lessen their reliance on revenue from the sale of arms. Think of it like a back-up plan if you will, but it makes good common sense to diversify in this manner. Most mature industries sees consolidation eventually, and I consider it a prudent move on the part of S&W leadership to snatch up a laser sight company, a knife manufacturer, and other relevant businesses toward that end.

S&W doesn’t pay a dividend, choosing to invest in growth instead. With earnings-per-share of $1.72 for the recent quarter and a 73% year-over-year increase in stock price, you might assume the stock is overpriced. But with a healthy P/E ratio of 14.86 and forward earnings growth of 14% or higher, coupled with a diverse and growing base of products, I feel this company is worth keeping in your sights.

Everybody’s Getting Older

Did you know that on average 10,000 Americans turn 65 every day? As boomers age and move into their late seventies and eighties, many of them look to managed care solutions such as nursing homes and senior care centers. There are numerous Real Estate Investment companies who are taking advantage of this inevitable trend. Known as a REIT, a Real Estate Investment Trust is required to pay out the majority of its profits to investors in the form of dividends. Not only do investors gain from the capital appreciation of buildings under management, but they also enjoy increasing cash flow as rents and fees increase, as well as some of the highest dividend payouts available. Three companies are well-positioned to maximize the opportunities in this sector: Welltower, HCP, and CareTrust.

Welltower (NYSE:HCN) owns a massive portfolio of senior housing properties in the US, UK, and Canada. Notably, Welltower has increased its dividend payout an average of 5% every year since 1971. Expect a 4.5% dividend if you add shares to your portfolio.

HCP (NYSE: HCP) invests in long-term care facilities and medical office buildings, and pays a very generous 5.9% dividend. HCP has a low P/E ratio of 12.93 currently as a result of investor uncertainty surrounding an upcoming spinoff of some of the company’s under-performing assets. A wise investor would view this as a buying opportunity, as shares are likely to rise after this streamlining of operations.

CareTrust (NASDAQ:CTRE)  is a small-cap player in a large-cap space, with just $800 million in market capitalization. CareTrust invests in healthcare and senior housing properties throughout the US. I believe the company provides an excellent opportunity to invest in a rapidly-growing industry on the cheap - with shares trading for around $15. While you’re waiting for your share prices to rise, you can enjoy the generous 4.6% dividend – which I recommend you reinvest in more shares of this great company.

When the Dollar Weakens, Go for the Gold

I’m personally not a believer in hoarding gold bars as an investment, because precious metals tend to be speculative. That is, they only rise in value under certain circumstances, and often retreat after the season passes. Gold bars certainly don’t compound in value the way stocks can, so the threat of inflation is always a specter looming over the spot price of the pliable metal.

That said, there are ways to invest in companies who deal in gold, silver, and other precious metals without the burden of hiding your own bars.

Silver Wheaton (NYSE: SLW) trades in gold and silver, but they don’t operate mines as you might expect. Instead, they supply capital at the early stages of mine development in exchange for premium rates on any precious metals that are found. They then profit from the difference in price paid versus sold. For example, last quarter Silver Wheaton was able to sell gold at $1,267 per ounce which it had acquired for $401 per ounce. Smart management has steered the way to wins like this over the years, making it a wiser way to invest in the precious metals sector.

I should note that SLW is not profitable at the moment, but they do pay a small dividend of 0.8%, and could see profitability soon if precious metals prices continue to rise.

The End?

The US has endured numerous wars, several economic implosions, dozens of natural disasters, and is still the dominant player on the world stage - and should remain that way for many decades to come.

That means smart investments today in the right companies can turn your hypothetical $1 million dollars into millions more in the years to come. Here’s to your health!

Disclaimer: I own shares of HCP and CareTrust.

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