Stock Picks to Go Fourth and Ponder
By Amey Stone
Exploding fireworks may be the most common Independence Day image, but a more appropriate theme for investors this holiday weekend is the family picnic, says Nick Colas, director of research at Rochdale Securities. "July Fourth is a back-to-basics holiday," he says. "This is a good time to think about stable, sound businesses that are non-cyclical, less volatile."
Several of Colas' favorite stock picks offer a solid potential for return and also fit in with a Fourth of July theme. To find strong companies at reasonable prices, Colas compares their real return on capital (the percentage returns generated from assets) to their estimated cost of capital (how much a company pays to finance its activities as a percentage of all of its capital). The wider the spread between the two measures, the better. If the stock has a hefty dividend, that's an added plus, he says. Here are are six stocks he thinks are worth considering this Independence Day:
Anheuser-Busch (BUD ): "Drinking Budweiser is as American and apple pie as you can get," says Colas. He also thinks the stock, which closed June 30 at $45.75, can reach $56.50 in the next year. Its trailing 12-month return on capital is 16.9%, vs. an estimated cost of capital of 5.6%.
"It's a very stable business, and the inherent risk is very low," says Colas. "It's also a cheap stock," he says, pointing to the 2.1% dividend yield.
Campbell Soup (CPB ): Hot dog buns, a staple of any Fourth of July barbecue, are made by this iconic American food company, which owns the Pepperidge Farm brand as well as Godiva, Pace salsa, and Swanson. For the last 12 months, its return on capital has been 14.6%, vs. a 5.9% cost of capital. In just six months Colas thinks the stock, now at $31, could reach $35. He also likes its 2.2% yield.
Jarden (JAH ): This diversified conglomerate, which makes Diamond matches as well as Coleman outdoor stoves, has been one of Colas' favorites. The stock jumped when it announced on June 29 that it was buying Holmes Corp. (HMHB ), a maker of crock pots (how's that for Americana?).
"No one likes to buy a stock after a big spike," Colas says. But at $54, Jarden still looks attractive. Colas gives it a 12-month price target of $68.43. The company's return on capital is 10.7%, vs. a cost of capital of 6.1%.
Alliant Techsystems (ATK ): For those who associate Independence Day with American military might, this weaponmaker would have patriotic appeal, says Colas. The Iraq war has meant strong demand for its munitions. While its return on capital is 9.4% -- not the highest -- its cost of capital is 5.3%, so it meets Colas' criteria. The stock is at $71 and Colas' price target is $87.34. It's on his firm's focus list.
B&G Foods (BGF ): Don't hold the pickles, advises Colas. Foodmaker B&G, producer of pickles, relish, and salsa, is a staple of every picnic. The security is rather unique, since every share has a bond component attached to it. That limits its chance for appreciation, but the yield is a staunch 11.7%.
"In reality what you have is a little balanced fund in one security," says Colas, who doesn't cover it for Rochdale because of its hybrid quality. Still, he thinks it's a solid pick for the Fourth of July. Due to the high yield (which doesn't qualify for the special tax treatment afforded to equity dividends), this security might be best held in a retirement account, he adds.
General Electric (GE ): This is the archetypal American company, and its stock also meets Colas' criteria for a good buy. The return on capital is 10.7%, and its cost of capital is 5.6%. Currently trading at $35, his price target is $41. GE announced a major restructuring in mid-June that Colas thinks is a smart plan. As long as economic growth stays solid, "GE is going to do fine," he says.
While none of these stocks has the flash or sparks of a firecracker, they're the kind of steady, long-term businesses that may offer solid returns. For a holiday like the Fourth of July, some of these stocks may be worth sticking in your picnic basket.
Stone is a senior writer for BusinessWeek Online in New York