In Homer’s epic poem The Odyssey, the main character, Odysseus, has the sailors manning his boat and plugging their ears as they sail by the sirens. The sirens were a mythical collection of creatures that sang to passing ships, enchanting those onboard, and luring them to their deaths as they steered their ships into nearby rocks. The wax Odysseus’ men placed in their ears allowed them to keep sailing and avoid the so-called siren song that drew the unsuspecting onto the rocks. Odysseus, meanwhile, had himself strapped to the mast of the ship so that he could hear the song, but not act on it.
A good stock story or a fast moving share price often have the same effect on investors as the mythical siren song had on sailors. Although everyone would like to believe that willpower is enough to avoid the siren song of alluring stocks, the truth is that focusing on safer investment fare is often difficult—especially in a world driven by immediate news. One way to avoid being drawn onto the investing shoals by “the next hot stock” (that turns out to be anything but) is to focus one’s attention on conservative fare and simply “plug your ears” so that more exciting, and often more risky, stocks aren’t even a consideration.
Value Line offers a number of proprietary measures to help investors identify such conservative stocks, the most notable being the Safety Rank. This measure is computed by averaging a stock’s Price Stability score and its Financial Strength Rating. Safety ranks range from 1 (Highest) to 5 (Lowest) and are distributed roughly in a bell curve, with the largest number of stocks scoring 3 (Average) and a smaller number at the extremes. Obviously, selecting stocks that score 1 or 2 (the best possible scores) would help investors avoid riskier fare.
Value Line provides screens each week, published in the Index section of The Value Line Investment Survey, that cull out stocks earning the best Safety Rank and the second best Safety Rank (presented as two separate screens). This alleviates the need to rummage through on a stock-by-stock basis, trying to find the most conservative options. Some interesting stocks that recently made these elite lists include Nike Inc. (NKE), H.J. Heinz Company (HNZ), and Baxter International Inc. (BAX).
Nike is the largest seller of athletic footwear and apparel in the world. It designs, develops and markets products that are produced mainly outside the United States. Running, training, basketball, soccer, sport-inspired casual shoes, and kids’ shoes are currently the top-selling footwear categories, but Nike also makes footwear designed for baseball, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses. Nike’s shoes are designed for athletic use, but a large percentage are worn for casual purposes. Products are sold “Direct to Consumer” through Nike-owned retail stores and nike.com, as well as through third-party retail and web outlets. The company's wholly owned subsidiaries include Cole Haan, Converse, Hurley, and Umbro.
Fiscal 2011 was a good year for Nike, as earnings advanced 14% on strong volumes and resulting operating leverage. Management hopes to keep the momentum going with new product offerings including footwear made of renewable resources. Apparel is another area of focus, since it presents a much larger market opportunity than footwear. The company has revamped its lineup and consolidated some styles, which should benefit profitability. A focus on emerging markets like China and Central and Eastern Europe should boost long-term results. Too, Brazil presents another opportunity as it is set to host the 2014 World Cup and 2016 Olympic Games.
Recent market weakness caused Nike shares to surrender roughly half of the price gain realized immediately following the strong May-period earnings release. Therefore, conservative long-term accounts may find the shares appealing.
H.J. Heinz Company
H.J. Heinz manufactures and markets an extensive line of food products throughout the world. The Company’s principal products include ketchup, condiments and sauces, frozen food, soups, beans and pasta meals and infant nutrition. Many foodstuffs are prepared from recipes developed in the Company’s research laboratories and experimental kitchens. Pre-season contracts are made with farmers for certain raw materials, such as tomatoes, cucumbers, potatoes, onions and some other fruits and vegetables. Major North American trademarks include Heinz, Classico, Ore-Ida, Tater Tots, Bagel Bites, Smart Ones, and Lea & Perrin. Revenue breakdown: Ketchups and Sauces, 43%; Meals and Snacks, 40%; Infant, 11%; Other, 6%.
The company has its eye on international expansion, particularly in China, Brazil, and Russia. Its ample resources should allow it to swiftly take advantage of overseas investment opportunities in these, and other emerging regions. Further, Heinz plans to close five plants, trim its workforce, and consolidate European operations, which should result in significant cost savings ahead.
Value Line analyst Warren Thorpe looks for a solid earnings advance in fiscal 2011 for this mature company. Thorpe points out that although our projected bottom-line growth rate may not interest momentum investors, those looking to add stability to their portfolio may find the shares attractive. Indeed, they have proven relatively resilient to the steep stock market downturn of the past two weeks, declining only 4.5% versus the S&P 500 Index’s 6.3%.
Baxter International Inc.
Baxter International develops, manufactures and markets products that save and sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. Due to the severity of these conditions, most require immediate medical attention. Therefore, the company is more insulated from the effects of a weak economy and high unemployment rates than other healthcare enterprises. Baxter’s products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices, clinical and medical research laboratories, and by patients at home under physician supervision. It manufactures products in 27 countries and sells them in more than 100 countries, providing international diversification that adds to the conservative nature of the stock.
The company reported strong June-quarter earnings per share results of $1.07, exceeding the high end of its guidance range by $0.04. The Bioscience unit (processes recombinant and plasma-based proteins to treat bleeding disorders and immune deficiencies) was the standout, advancing in the mid-teens year over year (10% sans currency translation). We expect strength to continue thanks to new GAMMAGARD LIQUID (the liquid version of its antibody replacement therapy for patients with primary immunodeficiency) dosages, delivery options, and indications (or reasons to use the medication). Specifically, the FDA recently approved Subcutaneous (subQ) use of GAMMAGARD LIQUID which allows patients to self-administer their therapy at home on a weekly basis. Another version, HyQ, is awaiting FDA approval (likely in 2012). It incorporates hyaluronidases enzymes that speed the dispersion and delivery of the medicine and possess a tremendous market opportunity. Finally, different adaptations of the drug are being tested to treat two neurological disorders.
Management has expressed confidence in near-term results by raising the midpoint of its earnings per share guidance marginally. We look for the aforementioned products, as well as a new Alzheimer’s treatment to help drive solid risk-adjusted long-term price appreciation.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.