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Stock Screen: Stocks with Low Risk - August 17, 2011
Investors can usually find stocks with low risk or stocks with strong expected relative price performance fairly easily. The challenge comes when you want to combine these two features, as the presence of one attribute often means that a stock lags in the other. In this screen, however, we seek to combine the best of both worlds, and search for issues that meet both of these criteria. To generate our list, we first required that all stocks be ranked 2 (Above Average), or higher, for Safety and 3 (Average), or better, for Timeliness (i.e. relative price performance in the year ahead), two of Value Line’s many proprietary ranks. Then, to further reduce the relative collective risk that is usually associated with stocks that offer high returns, we limited our cut to equities with a Price Stability Index (another one of Value Line’s proprietary measures) in the upper 10% of our universe (the Index runs from 5 to 100, with 100 being the top score). Finally, we required that each stock pay a meaningful dividend, with a floor set at a yield of 2.1%.
Not surprisingly, equities arising from this screen are largely considered defensive in nature, and our list is dominated by established and conservatively run companies, including Omnicom Group Inc. (OMC), TransCanada Corp. (TRP), Molson Coors Brewing Company (TAP).
Omnicom Group Inc.
Omnicom is a one of the world’s largest international advertising, marketing and corporate communications services company. Its agencies provide a range of services, which it groups into four disciplines: traditional media advertising, customer relationship management (CRM), public relations and specialty communications. Omnicom serves more than 5,000 customers in over 100 countries. Last year, international sales comprised 32% of the top line.
The advertising industry’s success is often correlated to the general health of the economy, and the domestic market may continue to waver in the coming months. Many of its customers have scaled back corporate spending over the past few months, and only now have they begun to stepped up advertising expenditures. Indeed, results from traditional mediums (broadcasting and cable television) have perked up recently, and we hope that this, along with the more dynamic platforms (i.e., digital and mobile), will breathe new life into the company and spur near-term results.
Omnicom has turned to emerging markets to fuel international growth initiatives. Healthy momentum in its Asian, Middle Eastern, and Latin American operations helped lift international revenues about 6% in the last quarter. Likewise, management has been pursuing acquisitions to bolster its footprint. These additions ought to be accretive to totals in the back half of the year. All told, we think that these growth efforts will help the relatively mature company grow in 2012 and beyond. Plus, OMC should continue to use available resources to reward its shareholders in the form of dividends and stock buybacks.
TransCanada operates the most extensive natural gas pipeline system in Canada, transporting natural gas from the Alberta border to Ontario, Quebec, and the United States with more than 37,200 mi. of pipeline. Pipelines comprised 54% of last year’s revenues, and its Energy segment contributed to the remaining 46% of total sales. The company has interests in Portland System (61.7%-owned), Great Lakes (53.6%), and Iroquois (44.5%) pipelines; and is general partner of TC Pipelines, and in another transmission company, CrossAlta (60%). TransCanada also owns power-generating assets.
Over the past few years, TransCanada has made hefty capital investments in its infrastructure. It has relied on joint ventures and acquisitions to extend the reach of its network. Although TRP has put a lot of commercial operations into play this year, the company remains somewhat vulnerable to the natural gas pricing environment. For example, much of the capital-intensive undertakings were made with the hope that the LNG (liquidized natural gas) imports and rates would build momentum. Unfortunately, TRP saw some setback to those valuations in the past few months. (Likewise, fluctuating currency exchange rates may also affect the Canadian pipeline company’s results, as much of its business is dependent on the American economy.) Still, its core pipeline network ought to take advantage of the explosive shale gas market.
Diversification efforts should help TransCanada bolster its business in the coming years. Management may well strengthen its power generation assets in addition to its mainstay gas transportation business. Too, TRP will probably continue to make strategic partnerships and acquisitions to complement its current holdings. Accordingly, we look for such moves to better position the gas transporter for the long haul.
This stock may tempt conservative investors, as it trades like a utility. Also, TRP holds a worthwhile yield compared to the general Value Line Investment universe.
Molson Coors Brewing Company
Molson Coors was created by the February, 2005 merger of Molson and Adolph Coors Company. It is the fifth-largest brewer in the world, with combined beer sales of roughly 30 million barrels a year. The company’s brands include Coors Light, Coors, Molson Canadian, Carling, Blue Moon, and Killian’s Irish Red.
The global brewer has turned to emerging economies for additional market opportunities. Plus, a 2008 domestic joint venture with SABMiller, dubbed MillerCoors, has helped it to improve distribution and better compete against Anheuser-Busch InBev (BUD). We believe Molson continues to eye accretive acquisitions to bolster its geographic expansion efforts.
Nonetheless, we look for much of Molson’s growth to stem from internal improvements. Ongoing cost saving efforts ought to help the company counter rising input costs and help lift the bottom line in the coming years. (Too, the recently reauthorized share buyback program, may well support per-share comparisons moving forward.)
In addition to investing in internal operations, the board raised the second-quarter dividend by 14%, which may attract income-oriented investors to take a closer look here.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.