With buyout activity on track to set a record in 2015, it's a good time to try your hand at divining the next big deal. A lot of deals are occurring in biotech, where big outfits often find it easier to buy a company and its products than to develop their own.
With 0.09% in annual fees, Fidelity Spartan 500 Index (FUSEX), which tracks the S&P 500, is among the cheapest mutual funds around. Parnassus Core Equity (PRBLX) held up better than the overall stock market during the 2007–09 bear market (when the S&P 500 plunged 55%) and during the 2015 correction (a 12% decline). Vanguard Short-Term Investment Grade Fund (VFSTX), a member of the Kiplinger 25, should weather an interest-rate rise well. If you worry that the market's recent swoon isn’t over but want to keep some skin in the game, then buy stocks that have a record of holding up better than most in down markets.
Over the past decade, Vanguard Dividend Growth (VDIGX), a Kip 25 member, returned 8.4% annualized.
Higher short-term interest rates would boost the money Paychex makes on cash held for customer payrolls, potentially lifting profits higher. We picked six big companies that we believe are reasonably priced relative to their profits.
It may sound counterintuitive, but a big part of the appeal of Wells Fargo (WFC, $54) now lies in expectations that the Federal Reserve will begin raising short-term interest rates soon. If the Fed starts to raise rates because the economy keeps improving, and if that improvement results in higher loan demand, so much the better for Wells, which has a long history of putting capital to work more profitably than most other big banks. Oracle is the dominant supplier of complex database programs and other software that is critical for major corporations.
Pharmacy-benefit manager Express Scripts (ESRX, $87) is a work in progress, which helps explain why the market has been somewhat standoffish about the stock. But the merged firm is still integrating operations, which has caused service disruptions and has driven some corporate clients to drop Express Scripts. But as a sluggish world economy and rising competition have held back growth in some of Accenture’s traditional lines, the company has pushed hard into digital services, such as advising businesses on social media. Accenture’s digital-services revenues rose 20% in the first half of the fiscal year and now account for 20% of total revenues, says analyst Lou Miscioscia, of investment firm CLSA Americas. We reserve the right to excerpt or edit any posted comments for clarity, appropriateness, civility, and relevance to the topic. Despite a rally that has seen the market more than double from its bear-market low in 2009, stocks still represent good value. Here are 23 stock picks for you to consider in 2013, culled from Kiplinger's investing editors and columnists James K.
With stocks slumping over the past year and the market gyrating wildly so far in 2016, it looks like a good time to settle down with solid, dividend-paying stocks. Historically, dividends have generated about 40% of the market’s total returns (the rest has come from price gains). We chose five firms that are steadily boosting earnings and dividends along the way, measures that should help lift their stock prices, along with two high-yield stocks that seem worth the extra risk.
All prices and returns are as of March 1; price-earnings ratios are based on estimated profits for the next 12 months.
Decades ago, one of the best ways to scoop up dividends was to own stock in the Bell System phone monopoly. As the country’s largest private payroll processor, ADP is riding a hiring wave that has seen the U.S.
The stock of networking-equipment maker Cisco has been a dud since the dot-com boom ended in early 2000. Wall Street expects Cisco’s earnings per share to rise just 4% in the fiscal year that ends this July. One reason to like the stock now is that it’s a “self-help” story, says Pablo Zuanic, an analyst with brokerage Susquehanna Financial. Assuming world peace doesn’t suddenly arrive, sales should remain robust for Lockheed Martin.
Pfizer is trying to combine with Botox maker Allergan (AGN) in a $160 billion deal that would create the world’s largest drug firm.
Pfizer’s earnings aren’t likely to climb more than 5% this year, partly because the dollar is crimping profits earned in foreign currencies. Since 2007, Welltower has shelled out more than $27 billion to amass an enormous collection of health care–related real estate. As a REIT, Welltower must pay at least 90% of pretax income as dividends, and those payouts have risen steadily. Please Review the StockMasters Disclaimer and remember that information provided by our site is at the investor's sole financial risk.
Are you a nervous investor who's looking for a stable portfolio that won't keep you up at night? Our top candidates are Anacor Pharmaceuticals (ANAC, $118) and Atara Biotherapeutics (ATRA, $31).
The fund uses screens to filter out companies involved in tobacco, liquor, weapons and nuclear power, among other things.
And as its name suggests, you won’t have to worry about credit woes should the economy weaken. Quality Dividend Growth Fund (DGRW) holds shares of 293 dividend-paying firms with solid profit growth. The iShares Core High Dividend ETF (HDV) spreads its bets, squeezing out a 3.5% yield by focusing on health care, energy and retail com­panies.
That beat 97% of its peers—funds that invest in large-company stocks with growth and value characteristics.
CEO Satya Nadella is slashing costs to help boost profits and is steering the software giant toward hot tech areas, such as cloud computing and mobile products.
Plunging oil prices didn't stop ExxonMobil (XOM, $74) from raising its dividend this year—its 33rd consecutive annual boost.
So if you’re looking to put money to work, it’s a good time to be cautious: You want stocks that have a decent shot at moving higher in the near term but that can also avoid a severe drop when the market inevitably suffers a correction (decline of 10% to 20%) or worse. Rising rates typically help banks because they’re quicker to boost interest rates on the loans they make than on what they pay depositors.
A key risk, however, is that higher regulatory costs in the post-financial-crisis era will crimp Wells’s earnings power more than anticipated. But value-oriented fund managers see mature tech companies, such as software giant Oracle (ORCL, $43), more as portfolio bedrock: solid businesses that are growing slowly but can still generate huge amounts of cash that can be funneled to investors. That, and stock buybacks, have enticed the value-oriented investors at the Yacktman and FPA funds, both of which count Oracle as a top holding. But no start-up has figured out how to magically move a ton of grain, steel or coal a thousand miles. With the crash in oil prices, shipments from the midwestern shale-oil belt are expected to decline in the near term. The shares are now priced at 17 times estimated 2015 earnings and sport a dividend yield of 2.0%, the same as the overall market.
The ongoing integration problems have also led the company to get investors to focus on financial results that exclude temporary merger costs. The move is paying off: Growth in digital services was a key reason revenues rose a brisk 12% in the quarter that ended February 28, before adjusting for the strong dollar.


Wall Street sees a profit of $4.78 per share in the current calendar year, up just 5% from the previous year. In 2014, Macy’s joined the growing ranks of retailers that allow shoppers to buy online and pick up their items in stores.
Stocks in most major sectors are trading below their long-term average price-earnings ratios. The Livonia, Mich., firm is a leading supplier of safety systems to carmakers worldwide -- think seat belts, airbags, and braking and driver-assist systems. Analysts expect the market for Internet-based data storage and networking to grow 19% a year through 2020. If share prices resume their slide, dividends can provide some income to cushion the losses. Moreover, dividend payers tend to lose less than nonpayers during downturns and vault ahead of the broader market over long stretches. Stocks bought mainly for their payouts become less attractive than bonds as rates climb, the argument goes, so the share prices must come down to bring their yields closer in line with those of fixed-income investments.
It acquired DirecTV in 2015 to deliver satellite television services, aiming to defend its turf against cable providers and Verizon.
But analysts say AT&T should have no trouble handling debt payments as revenues and profits pick up. Assuming that doesn’t happen, analysts predict that ADP’s earnings per share will jump 12% in the fiscal year that ends this June and 14% in the June 2017 year. But profits should expand at a faster rate in the years ahead as Cisco’s tech bets start to pay off. Although sales are barely growing, the firm should be able to boost its bottom line with cost cuts as the companies combine manufacturing facilities and slash duplicate overhead. The company is the leading contractor for the largest weapons program in Pentagon history—a roughly $400 billion multiyear plan to build more than 2,400 F-35 fighter jets.
The merger is controversial because the smaller Allergan would buy New York–based Pfizer, and the combined companies would be headquartered at Allergan’s address in Dublin, Ireland. The company is lifting revenues with several recently launched drugs, such as pneumonia vaccine Prevnar 13, cancer drug Ibrance and blood thinner Eliquis.
Its roughly 1,400 properties range from outpatient medical facilities to assisted-living housing for seniors.
Higher interest rates would pressure their profits and could result in reduced property values. Private insurance and payments from individuals account for 87% of its revenues, protecting the firm against government spending cuts. Then cobble together a portfolio from our nervous investor picks that tend to gently sway during violent market swings. It also erodes the value of sales and profits generated overseas when they are converted from local currencies to greenbacks. Outside of biotech, we suggest Freshpet (FRPT, $11), a maker of pet food that could be a tempting target for a large consumer-products company. Markel also makes strategic, long-term investments in companies ranging from bakeries to homebuilders to makers of dredging equipment. Launched in May 2013, the fund at last report held 24% of its assets in domestic stocks, 32% in foreign stocks, 29% in bonds, 9% in alternative investments and 6% in cash. Each of the stocks showed its mettle during the May–August correction by faring better than the overall market. Although its 20% weighting in energy stocks has hurt returns lately, that stake will help once oil prices recover. Payroll processor Paychex (PAYX, $48), which handles payrolls for 590,000 small and midsize businesses, yields 3.5% and should fare well as long as the economy keeps expanding. Even if oil prices don’t recover much, Exxon should make more than enough money to keep the dividend streak going next year.
And, of course, you want to invest in businesses that are financially sound and have healthy long-term prospects.
Just as important, all six are leaders in their industries, and all are strongly committed to returning capital to shareholders by paying dividends, buying back shares or both. And Wells has historically gotten away with paying below-average rates on its massive base of deposits, which now exceeds $1 trillion, says Morningstar analyst Jim Sinegal. That means many clients find it expensive and risky to dump Oracle, and that helps keep them aboard while the company adapts to cloud computing. BB&T Capital Markets says that Union Pacific has the most diversified shipping mix of any railroad. The biggest drug-benefit manager should have an advantage in ensuring its own profitability, as well as working to keep drug costs down for consumers.
Biosimilars are essentially cheaper versions of drugs now used to fight many cancers and other serious diseases. That strategy has built Accenture (ACN, $94) into a global leader in consulting, delivering advice to companies and governments on management, technology and other issues.
Accenture also raised its revenue growth forecast for the full fiscal year, which ends in August, to 8%–10% (before currency-swing adjustments ), from 5%–8%. More companies will seek help with digital strategies, “driving considerable growth for Accenture,” he adds. Sales have continued to edge higher since the 2007–09 recession, even as the retailer has closed underperforming stores.
After lifting profit margins over the past five years, the retailer’s goal now is to maintain those margins while driving faster sales growth in its 825 Macy’s and Bloomingdale’s stores and online, says brokerage Stifel Nicolaus. At the same time, companies are sporting profit margins and cash levels above their historical norms. In the July–September quarter, foreign sales rose 15% from the same period in 2011, driven by nearly 40% growth in China. And it will continue to increase its research-and-development budget at a double-digit pace. Toll Brothers recently reported that the backlog of homes under construction had climbed 59% from the year before. As the number of broadband Internet subscribers increases, Comcast is emerging as one of the most adept players on the changing telecom scene. Folding in DirecTV—and offering unlimited data to customers who buy both TV and phone service—should help AT&T hold on to “higher-value subscribers,” says James Moorman, an analyst with brokerage firm D.A. The company’s payroll customers stick with ADP for an average of 12 years, providing a steady base of revenues. ADP is also a dividend champ: It has hiked its payout for 41 years in a row—a streak in no danger of ending. It recently lifted its quarterly dividend by 24%, to 26 cents per share, and it authorized a new $15 billion stock-buyback program—moves that have helped the stock top the market so far this year.
It plans to spend $1.4 billion to buy Jasper Technologies, a start-up involved in the “Internet of Things,” which connects everything from cars to medical devices to the Web. Brian White, an analyst at brokerage Drexel Hamilton, sees the stock hitting $34 over the next 12 months.
Buffett helped engineer the combination of the two food-industry stalwarts, first by buying Heinz and then merging it with Kraft Foods in 2015, creating a packaged-food giant with more than $27 billion in annual sales.
Zuanic estimates that those savings could hit 10% to 12% of annual sales, much more than the 8% the company anticipates.


Lockheed’s lineup also includes combat ships, missile systems and a spacecraft it’s building with NASA for an upcoming journey to Mars. With its 2015 acquisition of Hospira, Pfizer entered the market for generic versions of biotech drugs, which could be another big source of revenues. In addition, Welltower generates about one-third of its revenues from managing senior housing, which gives it more ways to lift profits than just being a landlord. Most of its senior housing is in markets without much competition from new properties, says brokerage Canaccord Genuity.
If the dollar continues to strengthen, you may be better off investing at home—or, rather, in the stocks of homebuilders.
But because the odds of a takeover actually occurring are low, we searched for stocks that could perform well even if a deal doesn't materialize.
Over the past year, Markel's stock soared 26%, while shares of Berkshire (BRK.B, $130) sank 6%. All three boast above-average dividend yields and get high marks from Wall Street analysts. Oracle’s business of licensing software to users at a hefty up-front cost is being challenged by so-called cloud computing, which delivers software over the Internet on a pay-as-you-go basis. Surprisingly, sales in the quarter that ended February 28 rose 6% from the year-earlier period, excluding the depressant effect of currency shifts. What may surprise many investors is just how lucrative the railroad industry has been in this new millennium.
Fears of weakening traffic have slammed rail stocks recently, driving Union Pacific from a high of $125 to $108.
What’s more, the company boasts a long string of years with double-digit-percentage annual profit growth, interrupted only briefly by the 2007–09 recession.
Express Scripts showed its clout in December, when it forced two makers of costly hepatitis C treatments into a price war. But as has been the case at many multinational firms, the strong dollar is vexing Accenture. But knowing that currency turmoil is transient, investors are willing to pay up for the prospect of better future growth and the likelihood that Accenture will keep boosting its dividend, Miscioscia says. More important, Macy’s has boosted earnings every year since 2009 and driven up its net profit margin (net profits as a percentage of revenues) to levels that now exceed those of rivals Kohl’s and Nordstrom. One new step in that direction: Macy’s is buying cosmetics and spa chain Bluemercury and plans to open locations in select stores. Cash-rich companies that can manufacture growth in a tepid economy will deliver the goods to shareholders. Coach pulls in average sales of $2,500 per square foot per year from its more than 800 stores worldwide, 25% more than rival Tiffany. The Elgin, Ill., nut processor has done much to make its brands -- Fisher and Orchard Valley Harvest -- stand out. The Palo Alto, Cal., company creates software that builds and manages cloud-computing systems so that companies can work more efficiently. And it's one of the most profitable banks, with a net profit margin of 18.1% -- better than that of most of its peers.
The firm has also expanded into other business services, including the administration of human-resources benefits.
Paying about two-thirds of its earnings as dividends, ADP should have plenty of room to increase its payout down the line. Cisco has also bulked up its offering of services, security software and other products, spreading its bets across an array of tech businesses.
If Kraft Heinz does slim down that much, Zuanic figures that it could earn $5 per share by 2019, which would justify the stock reaching $98 within a year.
Pfizer also supplies consumer products, such as Advil and Centrum, although it may sell the division that makes them to focus more on its core pharmaceutical business. What’s more, Welltower is financially healthy enough to buy more real estate and boost dividend income. So we culled Goldman's list for companies that most Wall Street analysts rate as "buys" and that trade for at least 40% less than analysts' average 12-month price targets. And with the blessing of regulators, big banks have been freed to return more money to shareholders. Although the company is based in Ireland, it operates worldwide and reports results in dollars.
Macy’s has also focused on channeling cash to shareholders via stock buybacks and by raising its dividend more than fivefold since 2010.
Macy’s shares have soared from $8 to $65 over the past six years, but at 14 times estimated earnings for the fiscal year that ends in January 2016 and yielding 1.9%, the stock is a solid bet in a growing economy, says Stifel. Analysts see Covidien’s plan to spin off its drug business as a positive, allowing the company to focus on its faster-growing and more-profitable devices business.
Single-family homes account for 53% of sales; high-rises, senior communities and multifamily homes make up the rest.
And ADP will benefit from higher short-term interest rates (whenever they come) because they will increase the income it receives from holding customers’ payroll cash.
And Lockheed expects to expand business at helicopter maker Sikorsky, which it acquired last year in a deal that cost $7.1 billion after tax benefits. Overall, the stock is a “high-quality play in the defense industry,” says RBC Capital Markets analyst Robert Stallard, who sees the shares hitting $244 over the next 12 months.
Pfizer says it sees no legal hurdles to the merger, which it aims to close in the second half of 2016. Over the next 12 months, Canaccord figures that the stock could hit $79—a 20% increase from the current price, on top of the plump dividend yield.
Wells was expected to announce a 7% dividend hike shortly after we went to press, and there’s more to come. Its 12% revenue gain in local currencies last quarter became a modest 5% increase in greenbacks. The stock sells for 15 times estimated profits for the current fiscal year -- not expensive for a company that analysts think can generate 14% annual earnings growth over the next few years.
TRW expects revenues from China and South America to grow 10% a year through 2014, offsetting flat sales in Europe.
But VMware's sales and profits have grown 23% and 25% a year, respectively, since 2007, and analysts see similar earnings growth over the next few years. Wells, which reported record earnings in the second quarter, raised its dividend in 2011 and 2012.
Sales of new homes are gathering steam, so analysts expect both companies to generate double-digit-percentage profit growth this year and next.
Simply put, the railroad infrastructure is highly efficient at moving goods and is impossible to replicate.
The stock, which has a market value of just $184 million, sells for 11 times estimated 2013 earnings.



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