Sunday, November 6

Week 18 - Hardy Perennials

Situation: Some companies manage to perform well through thick and thin.There are lessons to be learned by looking at price performance over the short, intermediate, and long term. Stocks that yield more than the S&P 500 Index provide more of their total return from dividends than price appreciation, but a consistent price appreciation is indicative of dividend payouts that will keep increasing. It can also act as a tip-off to where the economy might be headed. 

Goal: Find common characteristics among the companies that compose the updated ITR Master List and have outperformed the S&P 500 Index over the last 3 mo, 1 yr, 5 yr and 15 yr intervals.

These 11 stocks fit the above criteria and made our cut:

In a previous blog, we discussed what we called Lifeboat Stocks which are companies that sell consumer necessities and carry low debt. This blog's particular group of ITR stock picks has prices that tend to track the S&P 500 Index during bull markets but hold up better during bear markets. Interestingly, of these 11 stocks we find that 5 (MKC, ADP, ABT, NEE, and WMT) are also Lifeboat Stocks. What does this tell us? Quite simply put, that the past 15 years have been dominated by bear markets. 

The remaining 6 stocks (CVX, XOM, OXY, MCD, CL, and NSC) represent “core holdings” that tend to track the ups and downs of the S&P 500 Index. In order to outperform in hard times, these 6 companies would also have to be producing, transporting, or selling essentials. And this does appear to be the case: gasoline stations, electricity, and fast food restaurants have become necessities in our modern society. Each of these 6 companies also faces strong competition, so their out-performance has to be rooted and grounded in management’s focus on innovation and execution

Hardy perennials are flowering plants that take root and then continue to sprout and grow on a yearly basis. This requires a root system that is adapted to surviving sometimes severe weather, often with less than ideal soil conditions. Gardeners come to think of hardy perennials as being not that much different from weeds in that they can be difficult to eradicate and highly adaptable. We will revisit companies that continue to behave like “hardy perennials”.

Bottom Line: We are living through some tough times. The strongest companies remain those that focus on meeting the average consumer’s basic needs.

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