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.
Health Care
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.
Examples include Johnson and Johnson, Abbott, Medtronic, Becton Dickinson, Novartis, Stryker, and C.R. Bard.
Energy Consumption
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).
Examples include Exxon Mobil, Chevron, Shell, ConocoPhilips, Total, Brookfield Infrastructure Partners, among countless others.
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
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.
Conclusion
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.
BeatingTheIndex
I am totally with you on the energy sector as long as the global economy is growing.
laura carabello
Interested in healthcare and solar energy
Sustainable PF
Thanks for the bullish sectors.
While most don’t pay dividends yet, we’re bullish on the renewable energy/green sector long term. EEI has a decent yield.
defensiven
I am also bullish for the energy sector. Low valuations.
I also think there are many good values in the healthcare-sector. I prefer the quality picks like J&J or Novartis. It feels like they are valued low just because of them being in a sector were competitors are having major problems.
I think Hudson is another example of a great company being valued fairly low just because its in the “wrong” sector.
Think Dividends
Great Outlook Matt!
I like your conservative approach to playing Emerging Markets with KO, MCD and DEO.
You should try to profile Enbridge (ENB) this year. It’s a great energy infrastructure company.
Happy New Year!
Steve
Matt
Sustainable PF,
Interesting pick. I’ll have to look into it some. It doesn’t have much of a dividend history, but it’s interesting to see such a micro cap paying dividends at all.
Defensiven,
I’ve got a Hudson analysis coming up one of these weeks. I’ve already written it. And ever since looking into it months ago, I’m pretty favorable towards it and plan on initiating a small position in it. So I agree with your recommendation!
Steve,
Thanks for the stock recommendation. ENB’s got a solid dividend history, but with a high stock valuation and an extremely high dividend payout ratio, it looks a bit odd. I’ll have to look into it more closely. Is there anything particular about it that stands out to you? I assume it’s factoring in increased upcoming recovery volume.
defensiven
Good to hear, it will be interesting to read about your view on Hudson!
I forgot to mention that I also agree with your view on insurance and exposure to emerging markets. It is interesting how we have such similar views on many things but still so different portfolios.
Just to clearify, with energy I meant gas/oil. I would not go into wind or solar.
Dividend Growth Investor
DM,
I am in the same boat as you – I like emerging markets, energy, healthcare as long as they do not get too pricey. Investing for the long run and avoiding “noise” such as headlines, quarterly “news” etc is a smart move in my opinion. After all, if the company can still afford to pay the dividend and raise it consistently, it shouldn’t really matter whether there is a 1-2 year recession and that the stock price is down 20 points from the highs at $70. You get paid no matter what happens in the markets. ( as long as fundamentals are sound of course )
Wish you investment success in 2011!
Dividend Growth Investor
Andrew Hallam
Hey Matt,
I think you’re 100% right in picking Western businesses that will rock in the emerging markets. As someone living on the edge of the economic Tigers (here in Singapore) I can see how rampantly certain Western businesses are growing in Thailand, Malaysia, Indonesia and China. You are so very very right to be picking those “emerging market” stocks.
My Own Advisor
Excellent post Matt.
I agree with what many folks have already said, as long as there are more people on this planet, we’ll need energy, lots of it. I would be interested in your take in the following companies, SU, COS.UN and CPG. I feel all these companies will skyrocket in the coming years. I wonder if you feel the same?
I’m surprised you’re not bullish on financials? Canadian and/or U.S. banks? This sector has huge potential to rebound in the years to come in the U.S.
Have a good weekend,
Mark
Matt
Mark,
This is not an exhaustive list of things I’m bullish on. It’s basically a list of the things that I’m both a) bullish on and b) feel that they fall into my circle of competence fairly well.
I expect financials to eventually rise, but the large ones are like black boxes in some instances. Their financial downfall was abrupt and most didn’t see it coming, and I’m not convinced that transparency is going to improve substantially. To me it seems that if I were to invest in those, I’d be investing on faith. I prefer more streamlined businesses, personally.
As for smaller banks and Canadian banks, I am bullish on some of them. I also find the defense sector valuations to be appealing, but I rarely mention them because I work in the aerospace industry and cannot buy defense stocks due to an agreement, so I never bother to thoroughly analyze them.
For the stocks you mentioned, their valuations don’t seem particularly low. Particularly for SU and CPG, their valuations are taking a recovery into account, and their current market caps compared to their level of profitability before the recession doesn’t seem to leave much room for huge upside unless there is some decent growth.
But on the timeline of several years, I like the industry prospects. I’d have to look through them more thoroughly, look at their recent capital investments, and read their strategies to have a stronger opinion about them.
Invest It Wisely
I’m also bullish on energy and the emerging markets, myself. These markets are going to be picking up most of the slack for the years to come.
Jeff
Matt,
First off, I agree with being bullish on oil companies(energy) and healthcare.
However, as a part of your reasoning for being bullish on Energy, you list that both China and India are growing. Don’t you believe that both of their economics have almost reached a standpoint and are entering dangerous levels of inflation. Over the past months both China and India have raised their interest rates by .25% in a way to begin fighting the inflation battle.
Just a thought,
Jeff
Christa
Great overview — I am looking at technology as the place to invest. I sure wish I would have invested in Apple a few years ago…
Muncie Birder
Your thoughts are pretty much in line with mine except I think I would avoid the insurance industry. Too much risk of major losses. I don’t particularly like big unpleasant surprises. I do like oil companies especially. Sort of like gold that is being rapidly depleted. Actually, more economically valuable than gold.
Barb Friedberg
I could not pass this one up. And I must say, you seem to be going in the right direction. I’m totally on board with the first three predictions. I’m unsure about insurance. This one’s going in my round up.
Jeff
Matt,
I know you wrote this post on January 6th, which seems like a long while back considering the new threats of inflation in emerging market countries. I recently wrote a post, criticizing Harvard’s endowment plan, which has increased their exposure to emerging markets and real estate over the past year. I feel that the emerging markets are extremely risky, considering the high prices in commodities. India, China, Brazil all seem like they will be affected in an negative fashion this year. What do you think?
Matt
Hi Jeff,
Regarding your recent comment and your previous comment about China and India, let me point out that these are very long-term predictions. They’re things I’m bullish on as we enter 2011, not things that will necessarily outperform during 2011. I don’t invest with my sights towards the end of the year; I invest with my sights set towards the end of the decade. But I find them timely now too because a) Health care and insurance are cheap right now (partly for good reason but way too low in my opinion), b) there seems to be a slow recovery, so energy will be necessary (and the long-term international trends need it), and c) The emerging markets are where companies are investing. It’s where Walmart, McDonald’s, YUM, Emerson, and the like, have their sights set.
Yes, there will be bumps along the way, and surely some major ones. I predict that China’s got to have a correction eventually. This year? Next year? Five years? Ten years? I don’t know.
But throughout the problems, I’m keeping a lot of exposure around the world. Brazil’s got a PPP per capita GDP of $10.5k, China’s is $7.5k, and India’s is $3.2k. There’s plenty more upside in those countries than in saturated markets.