Old School Value

2009 Top 40 Best Stocks to Retire On

This is part 2 of a 4 part series looking at each of the companies selected and listed by Fortune in their 2009 Fortune 40: The Best Stocks to Retire On list.

Part 1 | Part 2

Bargain Growth aka Growth at a Reasonable Price (GARP)

Companies 11 through 20 are categorized as stalwarts or companies that can consistently create growth. This is the Peter Lynch style section of the portfolio.

Another Lynch precept is to invest only in companies with debt-to-equity ratios below 0.33. That requirement eliminated three of our 2008 holdings: 3M, McKesson, and Parker Hannifin all carry slightly too much debt. Meanwhile, two of our other stocks, Accenture and Microsoft, managed to generate more free cash flow last quarter, proving themselves to be what Lynch calls “stalwarts,” or consistent performers. They remain on our roster. - Fortune

Now let’s look at the next 10.

40 Best Retirement Stocks: No.11-20

1. Cisco Systems (CSCO)
2. Microsoft (MSFT)
3. Walgreen (WAG)
4. Gilead Sciences (GILD)
5. Mastercard (MA): Outside circle of competence
   
6. Thermo Fisher Scientific (TMO)
7. Baker Hughes Inc (BHI)
8. Becton Dickinson & Co (BDX)
9. Bristol-Myers Squibb (BMY)
10. Carlisle Companies (CSL)

Although I understand what Mastercard does I’m still uncertain about the valuation process and my abilities to get deeper into financials so I’ll let it be. If you look at the embedded spreadsheet at the bottom of the post, you’ll see that I didn’t highlight a single one out of this 10 because I don’t believe there are any bargains in this list as the categorization suggests.

BHI, BDX and MSFT were priced lower than my valuations but BHI is too inconsistent and unreliable to be included in any long term portfolio. BDX looks to be a good company but the margin of safety just isn’t there.

Microsoft (MSFT) Commentary

Regarding MSFT, I’ve never liked it as an investment. As a company, MSFT is always falling behind in everything they do. They are slow to react, slow to innovate and slow to adjust. Look at the romping they get from Apple with the mp3 players, Mac books is inching up and even iPhone is a better mobile product than Windows Mobile (although iPhone isn’t just a software). Apple’s growing fan base can’t be beat.

In the gaming section, Wii is the market leader. I can’t actually remember MSFT ever being a leader in the gaming section either. Nintendo had lagging console game sales for years but put a major turnaround through innovation something that I find is missing with MSFT.

Search and Bing? Still less than 10% while Google has over 75% market share. Younger, sleeker and innovative company just sped past.

But having said all that MSFT is still likely to grow at a consistent pace with Windows and Office, they just can’t seem to dominate anything other than what they were doing since their startup years.

• Current Price: $24.04
• Discounted Cash Flow Fair Value: $32.17
• Ben Graham Formula Value: $43.50

Walgreen (WAG) Commentary

WAG is a company that I’ve always like and is a prime example of a consistent and faithful company. It goes about its business with expert precision and execution. If you look at their margins for the past 10 years, it is solid as a rock. No veering off course into stupidity, which is why the company is so widely followed and constantly hovering around fair intrinsic value.

This recession is a good chance for entry points on WAG for people that have been waiting for years to get a consistently growing company.

• Current Price: $29.34
• Discounted Cash Flow Fair Value: $24.42
• Ben Graham Formula Value: $52.74

Thermo Fisher Scientific (TMO) Commentary

TMO is a new addition to the portfolio and it is a good pick.

Thermo Fisher Scientific Inc. (Thermo Fisher), incorporated in 1956, is engaged in serving science. It provides analytical instruments, equipment, reagents and consumables, software and services for research, manufacturing, analysis, discovery and diagnostics.

• Current Price: $40.39
• Discounted Cash Flow Fair Value: $39.76
• Ben Graham Formula Value: $40.75
• Comments: Margins, growth and return metrics are good. FCF growth has been very strong but wonder whether it can be sustained. Increased margins in FY 2008. Sales becoming flat.

It seems like its premium value has been removed and is now trading at fair value. Really does seem like a GARP pick.

Becton Dickinson & Co (BDX) Commentary

Becton, Dickinson and Company (BD) is a medical technology company engaged in the manufacture and sale of a range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, life science researchers, clinical laboratories, industry and the general public.

• Current Price: $70.70
• Discounted Cash Flow Fair Value: $82.04
• Ben Graham Formula Value: $138
• Comments: Has consistently produced plenty of FCF but FCF growth has been minimal, very good CROIC of 15%, steady growth in shareholders equity/book value, stable rising margins, debt to equity is consistently dropping, sales has been increasing.

Bristol-Myers Squibb (BMY) Commentary

Has a nice dividend of 6% but growth has been somewhat slow when it comes to cash. However, their ability to generate cash returns off invested capital is very good at over 15%. I’m not very interested in BMY myself but I do wish there was somebody that could analyze and value Mead Johnson Nutritionals (MJN).

• Current Price: $20.24
• Discounted Cash Flow Fair Value: $17.11
• Ben Graham Formula Value: $29.94
• Comments: FCF is positive most of the time but inconsistent as in not able to raise it steadily with some big losses in between. Average return metrics. Normalized earnings is also low and inconsistent. Margins and sales unstable. I wouldn’t consider as a retirement stock.

Fortune 40 Best Stocks to Retire on Part2

Disclosure

No positions in any stocks mentioned at time of writing.