"Dull" Stocks and the Path to Profits

08/23/2016 8:00 am EST


Some say the market is overvalued and is about to have a major correction; others say that this indicates momentum and the market will keep rising. I believe the answer is some of both, asserts Russ Kaplan, value investor, money manager and editor of Heartland Advisor.

There are stocks that are highly overvalued and it would be dangerous to own them. Other stocks still meet our value criteria and can be bought today.

Analysts continue to make the same mistakes. But you are buying stocks and not the market. Market timing, based on the belief that stock prices can be predicted, has proven over the years to be a useless endeavor.

Meanwhile, in reviewing the year-to-date performance of one of our larger accounts and one thing the winning stocks have in common is that they are dull.

They are not exciting companies but they are financially solid companies providing products that everyone needs. In addition, they all pay a good dividend.

Throughout history a path to wealth has been to buy “dull” companies like these and hold on to them for long periods of time.

As Warren Buffett has said, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”

The point is, stocks with good fundamentals may not be the topic of conversation at cocktail parties and may not be at the forefront of new technology but, historically, they make good investments for the patient investor.

This month I am recommending a Canadian company, Magna International (MGA).

In view of developments in electric cars and ultra-efficient cars that run on conventional fossil fuel, can you predict today with certainty the future of the automobile industry? Can you say which company is going to sell the most cars the most profitably?

Me neither. That’s one reason I’m looking favorably on Magna International, a global auto parts supplier. We win no matter how things turn out.

As far as finances are concerned, Magna has an “A” rating. There is growth with a return on equity of 21.5% and the stock is undervalued with a price/earnings ratio of 7.5.

Magna International is well below its all-time high of $59.40 in 2015. I think this stock has the potential of reaching and even surpassing that all-time high.

Magna pays an above average dividend of 2.6% so you can afford to wait. Since 2012 the dividend has been increased five times and chances are high that it will be raised again soon.

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