I’m mostly a ground-up, fundamental, long-term investor. This means that I pick individual companies, analyze them quantitatively and qualitatively, and then decide whether or not to invest in them. I care little about short-term problems, and I view most financial media as noise. My focus is on the long-term growth prospects of the business, the quality of the products or services, the strength of the economic moat and of the balance sheet, the shareholder friendliness of the company culture, and the valuation of the stock in comparison to all of this.
I also try to look at the bigger picture, and find industries that are likely to be relevant and growing for the foreseeable future, and/or industries that as a whole have low stock valuations compared to company fundamentals. My strategy to utilize these trends is to identify specific companies that have access to these trends and invest in the ones that remain attractive after the previously mentioned fundamental analysis. A long-term investor must feel that his or her company is built to stand the test of time, and therefore it really helps to look for companies operating in a healthy industry.
So, it’s a combination of a macro-view and a micro-view. That being said, here are four things I’m bullish on as we enter 2011.
Populations in developed countries are aging, and people in developing countries are becoming richer and rightly seeking better health care. This is an industry that is perpetually necessary, and people will spare little expense to ensure that they and their loved ones are healthy. Due to regulation changes (and for some, patent expiration), the valuations across the sector are fairly low, but I believe that an approach of picking a few high-quality, diversified health care stocks will make for a promising investment over the next several years.
China has 1.3 billion people with high economic growth. India has over a billion people with high economic growth as well. Several countries in South America, Africa, and Asia are experiencing economic growth, and they’re expected to use larger and larger amounts of energy. There’s so many things to make, so many services to provide, so much infrastructure to build, and so many problems to solve. And all of this takes energy and raw materials. I feel that the major integrated oil companies, along with smaller energy and infrastructure companies are likely to benefit from this trend. Alternative energy companies generally have sky-high valuations, but some of the more diversified energy companies have pretty attractive valuations. Companies that provide transportation and infrastructure for the energy sector are in the same boat. I’m not going to attempt to predict energy prices, nor am I sure how these companies and stocks will perform over the course of a single year in 2011, but I expect that over the course of several years, many of these companies at current valuations will be good investments (particularly the ones with solid dividend yields).
Emerging Markets, and particularly Tech
It’s no secret that emerging markets grow more quickly than developed markets. The trade-off is that an investor usually has to deal with more risk and higher valuations, and these things eat away at investment returns. There are, however, several established companies in developed countries that have substantial exposure to developing countries all around the world. Companies like Coca Cola, Diageo, Colgate Palmolive, McDonald’s, YUM Brands, and many others are well-positioned to reap the benefits.
I think that tech companies, such as Intel, Analog Devices, Texas Instruments, Emerson Electric, and a host of other companies with technical products and services are likely to do well over the years.
Insurance is a small-moat commodity business, but their services are perpetually necessary and the business is straightforward and profitable. Several property and casualty insurers have particularly low valuations, such as Harleysville Group, Chubb Corporation, Cincinnati Financial, Safety Insurance Group, Travelers Group, and Tower Group.
Some of them not only have long-standing records of dividend increases, but their low valuations allow them to repurchase stock at extremely attractive prices to continue to fuel dividend growth and book value growth even without much company growth. The risk-adjusted returns seem very promising. Due to the difficulty in establishing an economic moat in this industry, I prefer to diversify into more than one company.
I don’t recommend every single company mentioned, nor do I guarantee that these four areas are the best places to invest over the next several years, but I think these are promising places to look. I particularly emphasize, as one may not be surprised, to look for decent dividend yields and dividend growth rates. I’m interested in reader opinion: where have you been finding the best values? What industries have attractive ratios between growth potential and stock valuation?
Full Disclosure: At the time of this writing, I own shares of JNJ, ABT, MDT, BDX, XOM, CVX, BIP, KO, TXN, EMR, HGIC, and CB, but none of the other companies mentioned.
You can see my full list of individual holdings here.