Question:
I’ve held shares of Nucor Corp for a while. I also have Southern Copper in my Basic Materials. I’d like to sell SCCO and put the money into Nucor. Think I’ll be OK to do so?
Answer:
Our first thought is the Materials sector is an area where we prefer to use an ETF. The Materials sector of the S&P 500 is dominated by chemical companies and neither of these companies are in that space. Nucor Corp. (NYSE: NUE) makes up 0.10% of the S&P 500, while Southern Copper Corp. (NYSE: SCCO) is not in the index.
If the decision is between Nucor or Southern Copper, we would rather own Nucor for the earnings growth. However, we don’t believe you can diversify within such a small sector (3.5%) or why you would try. Both companies meet the Henssler criteria for investment based on financial strength and safety, but we recommend Materials Select Sector SPDR (NYSEARCA: XLB) for diversification.
Question:
So I was screening Consumer Staples stocks and found that Fomento Economico Mexicano has a market cap of $205.5 billion—right under P&G! I’ve never heard of this company. Has a low beta, pays a dividend…what gives?
Answer:
First of all, the market cap you’ve quoted appears to be in pesos, as Fomento Economico Mexicano SAB (ADR) (NYSE: FMX) has a market cap of $33.66 billion according to the ADR sold in the U.S. financial markets. The company makes, distributes and markets non-alcoholic beverages throughout Latin America as part of the Coca-Cola system. They also own and operate convenience stores in Mexico and Colombia and hold a stake in Heineken. Needless to say, this is not like a Procter & Gamble! Fomento Economico Mexicano has a beta of 0.88 and pays a dividend of 1.54%, paying out approximately one-third of its cash flow from operations in dividends. If you are interested in a beverage distributor, we recommend PepsiCo (NYSE: PEP).
Question:
I’ve heard you say you love Amazon.com but you wouldn’t buy the stock. Are there any other well-known names where you like the product but wouldn’t buy the stock, and why?
Answer:
One of the first companies to come to mind is Garmin Ltd. (NASDAQ: GRMN). The company makes a fine GPS, but we prefer to avoid the stock as their sales are hindered by alternatives to their offerings. Anybody with a cell phone has access to free or relatively inexpensive GPS apps.
Tesla Motors Inc. (NASDAQ: TSLA) makes a cool electric car, but they just began flirting with economic profitability and their stock is really expensive. At $280 per share with a price-to-earnings ratio of 260, a price-to-earnings-to-growth ratio of 8, and declining deliveries in North America, we definitely would not consider this stock for investment.
Delta Air Lines Inc. (NYSE: DAL) is often the airline of choice for travelers, but Dr. Gene has often said airlines haven’t made money since the Wright brothers. While airlines have recently increased profits through higher fares, any spike in energy costs could wipe out those profits.
You can easily get into trouble buying stocks of companies you are familiar with. Thinking of some companies in businesses that seem to be antiquated, any public book store Barnes & Noble, Inc. (NYSE: BKS) or office supply stores like Office Depot Inc. (NYSE: ODP), it was Amazon or more broadly, the internet, which is killing these companies. In fact, before you buy any retailer, you must now consider whether it is threatened by the internet. Same for many of the hardware providers—will “the cloud” kill server manufacturers? These are things you must consider prior to investing in many industries today.
These are examples of both stocks we wouldn’t buy based on value and stocks whose industry we would avoid altogether. Likewise, there are stocks that we like both the product and the company as an investment, including Apple Inc. (NASDAQ: AAPL), Starbucks Corp. (NASDAQ: SBUX) and PepsiCo (NYSE: PEP).
Overall, we think investors need to be careful not to fall in love with a stock.
Question:
My broker’s latest recommendation is Red Hat Inc. While the stock seems good, the industry is led by other, bigger companies. Is this a takeover target? Does this company have legs otherwise in a crowded tech space?
Answer:
First, we tend to avoid buying stocks for the sole prospect of them being taken over, preferring instead to consider buying on the fundamentals of earnings growth, attractive price, attractive and reliable dividend, etc.
For those who do not know, Red Hat (NYSE: RHT) is a software company best known for its open source operating system named Linux. An alternative to Microsoft Windows, the software has not become so widespread in its usage and probably never will, although there are many who prefer Red Hat to Microsoft Corp. (NASDAQ: MSFT).
Red Hat is much smaller than Microsoft with a $11.2 billion market cap vs. a $386 billion market cap for Microsoft, making Bill Gates’ company 34 times Red Hat’s size. Red Hat has been publicly traded since 1999, during the Dot-Com boom. The company looks expensive as it trades around $59, has a PEG of 2.44 and a P/E 65.78. Long-term growth is projected at 16.35%. The stock has increased by 16.52% in past year, and increased 5.87% year to date, most of it since mid-March. While the company is profitable, we recommend avoiding Red Hat right now, perhaps waiting for a better valuation.
If you have questions regarding your investments the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. 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.
