Thursday , 15 November 2018


3 Quality Stocks I’ve Been Purchasing With Glee Over the Past Few Weeks

…Isn’t the bull market, now the longest in U.S. history, about to end in an epic market crash?…[My original article outlines] why this correction isn’t likely to become a bear market [but,] rather, it’s probably a great time for long-term investors to load up on great companies at bargain prices. [This article identifies 3]…of my highest conviction buys, which I’ve been purchasing with glee over the past few weeks.

 

This version of the original article, by Dividend Senseihas been edited* here by munKNEE.com for length (…) and clarity ([ ]) to provide a fast & easy read.  For the latest – and most informative – financial articles sign up (in the top right corner) for your FREE bi-weekly Market Intelligence Report newsletter (see sample here)

…I’m not saying that everyone should go 100% into stocks right now, nor that we won’t see current levels of volatility continue in the future. Rather, I’m saying that…today there are great bargains to be had…because market pullbacks/corrections happen, on average, every six months. For smart long-term investors these are not a…[detriment] to good returns, but the very fuel that drives them. The lower the valuation at which you buy a quality stock, the better your long-term total returns will be… #munKNEE.com being given away – Check it out!

…To help you get started, here are three of my favorite quality stocks to buy right now.

3 Great Stocks To Buy At Deep Discounts

While stocks in general might not be in for a bear market, plenty of great companies are already in one. Thus you can take the opportunity to use the market’s current fear, uncertainty, and doubt to lock in great long-term total returns.

Here are three great stocks trading at deep discounts. They include companies that I own myself, and are some of my highest conviction buys right now. In fact, I’ve been loading up on all of them hand over fist during this correction.

Company Yield Fair Value Yield/Estimated Fair Value Price Discount To Fair Value 10 Year EPS/Cash Flow Growth Forecast (Analyst Consensus) 10 Year CAGR Total Return Potential
A.O Smith (AOS) 2.0% 1.1% 44% 11.4% 19% to 20%
Iron Mountain (IRM) 8.0% 4.9% 39% 6.0% 19%
Amazon (AMZN) 0% $2,200 25% 46.9% 15% to 25%
(Sources: Morningstar, Simply Safe Dividends, Gurufocus, Fast Graphs, Gordon Dividend Growth Model, Dividend Yield Theory)

1. A.O Smith is one of my favorite fast growing dividend aristocrats to buy right now.

This maker of water heaters/air/water purifiers is…the industry leader in North America but it’s the fast growing China/India business that makes AOS a great long-term dividend growth stock. With about 34% of sales from China, trade war fears have caused this stock to fall off a cliff.

ChartAOS data by YCharts

In fact, AOS has fallen nearly 20% in October alone, and is now 36% below its all time high (severe bear market). Even with China’s demographic problems (will lead to slower long-term growth):

  • Management expects China to generate about 15% medium-term revenue growth and 12% to 13% long-term growth.
  • India’s growth potential is even better.

As a result, I agree with analysts that this dividend aristocrat should be capable of long-term dividend growth of 11% to 12%. Combined with the current yield and its mouthwatering valuation, that should be good for about 19.5% long-term CAGR total returns over the coming decade.

2. Iron Mountain is a hybrid storage/cloud computing REIT that I’ve been buying hand-over-fist…the past few weeks.

  • This REIT is the dominant name in global physical document storage.
  • More importantly, its decades long (founded in 1951) relationships with the Fortune 1000 are allowing it to transition its clients to its cloud computing data centers.
ChartIRM data by YCharts

Shares are down nearly 12% since the correction began, despite the REIT posting excellent earnings last week that include:

  • top and bottom line beats,
  • raising 2018 revenue and AFFO (REIT equivalent of free cash flow and what funds the dividend) growth guidance by 25%, and 60%, respectively.

Shares plunged 7% the next day after an analyst downgrade…based on a 12 month price target of $34…that gradual declines in core developed market storage volumes will limit the REIT’s short-term upside.

  • [That being said, those declines in North America and Europe physical storage are more than offset by very fast growth in emerging markets. As a result
    • IRM’s storage revenues continue to grow steadily (2.3%) and
    • its services business (including cloud) is growing at over 7%.
  • The REIT has a three year plan to accelerate long-term growth in emerging market storage and cloud computing that will also see it reduce its leverage ratio from 5.6 to 5.0 (REIT average 5.5). That should earn it a credit upgrade to investment grade (currently BB-), which will likely cause significant multiple expansion (currently P/AFFO 10).

At the end of the day this 8% yielding REIT (which just raised its dividend 4%):

  • offers a safe payout, courtesy of a forward AFFO payout ratio of 76% [although] that is expected to come down over time to allow IRM to complete its ambitious growth efforts, which analysts expect to cause 23% AFFO/share growth between 2017 and 2020.
  • has guided for “at least” 4% dividend growth through 2020 and after that it’s likely to rise as fast as long-term AFFO/share growth (6%).
  • Combine IRM’s low risk 8% yield with a long-term growth rate of 6% and 5% valuation boost over the next 10 years (as yield comes down to fair value), and you get about 19% CAGR total return potential. That makes IRM one of the best REITs (or any high-yield stock) you can buy today.

3. …Amazon is the only non-dividend stock I plan to own…Despite what the market would have you believe, the company just posted excellent earnings. The market is fixating on management’s “disappointing” 10% to 20% YOY revenue growth guidance for the holiday quarter. As a result shares declined 8% on Friday which puts Amazon at 20% off its all time high, and officially in a bear market. It’s important to keep in mind, however, that management is usually conservative with its guidance, and the holiday season is a tough one to forecast. Amazon could easily beat its top end sales guidance, and analysts remain confident the long-term growth thesis remains intact.

…How can one estimate fair value for this fast growing master of disruption? Well, for that I turn to Morningstar’s three stage discounted cash flow or DCF model. Morningstar analysts are known for their conservative growth assumptions, and usually model far slower growth than most analysts. Morningstar’s R.J. Hottovy believes that Amazon:

  • remains on track to generate long-term (five year) 23% CAGR revenue growth, which is roughly in line with its historical norms.

  • expects operating margin to rise to 7% to 8% over the next five years…up from 6.6% in Q3 2018… [with] the fastest growing businesses (Advertising and Amazon Web Services) also being the highest margin (75% and 31% operating margins, respectively).

I agree with the other assumptions baked into Morningstar’s valuation model (realistic in my view), and that shares are probably worth $2,200 today. That implies a 25% discount to fair value. While it’s tough to forecast long-term returns for a company like this, I expect Jeff Bezos to deliver between 15% and 25% long-term CAGR total returns over the coming decade.

Bottom Line:

The Bull Market Isn’t Dead Yet So Now Is A Great Time To Buy Quality Companies At Deep Discounts

(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.}

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