Question:
I would like your opinion on two stocks, Cisco Systems and Bristol-Myers Squibb. I hold both in my IRA. Cisco has a huge loss and Bristol-Myers has a small gain. Should I continue to hold these stocks or move the money into another stock? Also, what are several good stocks to consider for the long term?
Answer:
Cisco Systems Inc. (NASDAQ: CSCO) is the world’s largest supplier of high-performance computer networking systems. We haven’t been fans of Cisco as of late. The stock has returned just 1.73% annually over the past 10 years compared to almost 8% for the S&P 500.
In the company’s latest earnings report, they reported an 8% annual drop in revenue. Sales growth and earnings growth are both below its peers’ average. The stock looks cheap on a price-to-earnings basis compared to Technology sector, but is trading above its 5-year average, so it doesn’t look particularly attractive on a valuation basis. Additionally, CEO John Chambers has been at the helm for nearly 20 years now, and what we’ve learned is that he really knows how to talk a stock down following earnings. Even when the stock’s results beat expectations, he tends to be extremely cautious on their outlook which sends shares down.
Cisco does meet our criteria for investment, but we thing there are better options available. As far as good long-term holdings in the Technology sector, we like Qualcomm, Inc. (NASDAQ: QCOM) and Apple, Inc. (NASDAQ: AAPL). Both companies are expected to grow at a faster pace than Cisco and are cheaper on a valuation basis.
Bristol-Myers Squibb Co. (NYSE: BMY) is a global prescription drug maker, whose names include Plavis, Abilify, and Orencia. The company has been selling non-core assets, selling off about half of its manufacturing facilities and cutting a third of its employees in order to focus its efforts on its pharmaceuticals business.
Plain and simple, the stock just looks too expensive right now. It trades near its highest valuation on record, and has seen revenue and earnings fall since its top selling drugs Plavix and Avapro went off patent. On a price-to-earnings basis, it trades at a 45% premium to its industry and a 32% premium to the Healthcare sector. With growth expectations below those of its peers, we wouldn’t recommend the stock right now. On a positive note, it does pay a nice 3% dividend, but the sustainability of that dividend has come under scrutiny as they currently pay out 80% of earnings which are in decline.
For long-term holdings in the Healthcare space, we like Celgene Corp. (NASDAQ: CELG), which is a biopharmaceutical company focusing on the treatment of cancer with expected growth of nearly twice that of Bristol-Myers. Biopharmaceuticals are up big this year, but Celgene still looks cheap. We also like Aetna Inc. (NYSE: AET), which is one of the nation’s largest health care benefits companies and trades at a P/E of about 13 and is expected to grow at nearly 12%.
Question:
I’d like to invest in Polaris Industries. I know you’ve recommended Harley-Davidson in the past. What is your current opinion on these?
Answer:
If we had to pick one, we would recommend Polaris Industries, Inc. (NYSE: PII), as it offers better growth prospects and a more diversified portfolio.
While Harley-Davidson Inc. (NYSE: HOG) may make some of the best motorcycles on the planet and offers a variety of merchandise to go with those bikes, Polaris manufactures a better variety of on-road and off-road vehicles. Polaris makes all-terrain vehicles, or ATVs, motorcycles, and snowmobiles, and given the winter we just experienced, it’s likely that Polaris’ snowmobile sales were quite brisk.
Polaris shares are slightly more expensive relative to Harley’s with a P/E of 23.2 vs. a P/E of 20.5 for Harley-Davidson, but if you factor in their growth prospects, Polaris is cheaper. Polaris is expected to grow earnings more than 17% a year versus Harley’s expected growth of 12%. In terms of return on equity, there’s no comparison. Polaris’ ROE is more than twice that of Harley’s, and Polaris also operates with considerably less debt, likely due to Harley’s financing arm.
Question:
Are government bonds risk free?
Answer:
Well, generally they are deemed risk free because they are backed by the full faith and credit of the federal government. So most investors feel that their money is pretty safe and the U.S. government is not going to default. So generally, we deem government bonds free from default risk. However, bonds come with two other risks: interest rate risk and inflation risk.
We expect the Fed to raise interest rates in early-mid 2015. When that happens, bond prices will come down because of the inverse relationship of bond prices to interest rates. So a lot of people are concerned about having bond maturities far out because as soon as interest rates pop, they are going to be more interest rate sensitive. You stand to lose a lot of the principal value on those bonds if you need to sell them before they mature. Now if you are holding the bond until maturity, you really don’t have to worry about interest rate risk as much, because you’re still going to get the face value back at the maturity date.
You can avoid some of the interest rate risk with the new floating rate bonds the Treasury has issued. The bonds are re-priced when interest rates go up; therefore, you get the benefit of the new higher interest rate.
On the other hand, inflation eats into the yield that you actually realize. You may have a yield on a bond of 3%, but if inflation is 2%, your real rate of return on that bond is 1%. Inflation is eating a good portion of that return. And if inflation were to kick up beyond that 3% you’re not going to get the adjustment unless you have a Treasury inflation protected security or a Series I bond.
We recommend you stay short on your maturities. Right now we’re not recommending purchasing anything further out than five years, because you’re going to be less interest rate sensitive at that point. You want to keep your duration short, so you’re not as sensitive to interest rate movement. In most cases, we recommend holding the bond to maturity; therefore, we know what price we’ll get at the end.
At Henssler Financial we believe you should Live Ready, and that includes consulting experts for financial matters you do not understand. If you have questions regarding your financial situation the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
