Fortune 40 Best Stocks to Retire on:Part 2


This is part 2 of the Fortune 40 Best Stocks to Retire on.

Part 1 | Part 2 | Part 3 | Part 4

 

We previously looked at the first 10 companies that made up the list in Fortune’s 40 best stocks to retire on. Here we look at the next 10.

40 Best Stocks to Retire On: No.11-20.

  1. Cisco Systems Inc (CSCO)
  2. McKesson Corp (MCK)
  3. 3M Co (MMM)
  4. Microsoft Corp (MSFT)
  5. Parker Hannifin Corp (PH)
  6. Walgreen Co (WAG)
  7. Applied Industrial Technologies Inc (AIT)
  8. Carlisle Companies Inc (CSL)
  9. Cascade Corp (CAE)
  10. National Presto Industries Inc (NPK)

These companies are all very well established in their respective industries. The four companies that I felt were substantially below their fair value were CSCO, MSFT, PH and CSL. MMM was also below its fair value but due to a bad year and declining margins and low FCF growth, I’ve left it out of the group.

All companies have only been based on price and historical numbers. Please make sure that you understand the business and its future roadmap to backup the quantitative fair values. These are not deep value or net net stocks where the downside is limited.

Cisco Systems Inc (CSCO)

This is a great company. Couldn’t find anything wrong with it in terms of numbers.

  • Stock price as of May 5: $19.63
  • Discounted Cash Flow Fair Value: $30.13
  • Graham Value: $37.21

Microsoft Corp (MSFT)

A company that everyone knows already. Great margins, profits and cash generator.

  • Stock price as of May 5: $19.79
  • Discounted Cash Flow Fair Value: $32.17
  • Graham Value: $43.50

Parker Hannifin Corp (PH)

Parker-Hannifin Corporation is a full-line diversified manufacturer of motion and control technologies and systems, including fluid power systems, electromechanical controls and related components.

PH was one of my earlier holdings that I bought a few months before the crash. I like the growth potential it has and the way it has been run. Already up 60% since the rally.

They have good FCF growth, CROIC and margins are increasing.

  • Stock price as of May 5: $46.59
  • Discounted Cash Flow Fair Value: $69.80
  • Graham Value: $102.91

Carlisle Companies Inc (CSL)

Although the FCF growth and CROIC for CSL is on the low side, the margins are consistent and has a good margin of safety which is important for any stock to be a worthy of holding in retirement.

Carlisle Companies Incorporated (Carlisle) is a holding company for Carlisle Corporation. Carlisle is a diversified manufacturing company, which manufacture and distributes a range of products. They operate in the construction materials, transportation products and applied technologies segment that includes the food service products.

  • Stock price as of May 5: $23.95
  • Discounted Cash Flow Fair Value: $35.27
  • Graham Value: $70

Fair Value Calculations with Free Investment Tools

To calculate the fair value of stocks for yourself, you can download the free DCF investing spreadsheet, Ben Graham investment spreadsheet or get the premium version with many more features.

The First 20 Companies from Fortune’s List

Fortune40-Best Stocks to Retire on-2

 

Disclosure

No positions at time of writing.

  • PlanMaestro

    Am I crazy or these stocks look much better than the first list?

  • The next 10 is just as good. The problem is having too many choices. Considering these are large caps, the discounts are pretty good.

  • Ken

    One thing that may be of consideration for CSCO is outstanding options and their options issuing in general. Potential post of interest:

    http://seekingalpha.com/article/64013-who-s-sharing-cisco-s-cash

    Ken’s last blog post..Paul Graham on funding start ups

  • Susan

    Hi Jae, how come the result I calculated based on your DCF fair value formula is different from the price $32.17 you mentioned above? Did you revised the formula, Jae?

  • Hi Susan,

    The formula is only different if you are using the free version of the spreadsheet. I’ve made many tweaks to the premium spreadsheet so the results will be slightly different.

    On the other hand, if you are using the premium, it may also be because I’ve gotten to the point where I know what growth rate I should be using.

    One tip is to look at the historical prices and how it fits in with the intrinsic value line. Over time, price follows value so if the historical price of 10 years travels somewhat closely to the growth rate, you’ve found a possible realistic growth rate for the next 5 years or so, not the next year.

    Then it’s simply deciding what the discount rate should be. Is it a stable company throwing off huge amounts of cash flow (JNJ, KO, MSFT, CSCO etc)? Then you can just use a 9% rate, otherwise stick with 15% since we are making assumptions with DCF and it’s always better to emphasize present dollars rather than future dollars. That’s what a discount rate is. Whether you hold the future cash flow or the present cash flow more valuable. I always prefer to view present cash flows as more valuable.

  • Jim

    @Jae,

    None of your DCF or Graham Formula values are the same as the ones I’m coming up with and I’m using the same program. I’m stumped. I do use CROIC rather than FCF as my growth factor but switching it to FCF (I believe you mentioned that’s what you use), the numbers aren’t much different. For instance:

    Carlisle Companies, Inc. is a company that interests me but I’m getting a 5 Year DCF Intrinsic Value of $48.30, a 10 Year DCF Valuation of $50.72, & a Graham Formula Valuation of $59.72.

    Much different than the numbers you’ve posted.

    Jim’s last blog post..Axcelis Technologies, Inc. (NASDAQ: ACLS)

  • Jim

    @Jae,

    LOL I’m sorry, I just noticed someone had the same question as I did after the fact. Anyway, I actually like the fact that the version I’m using is allot more conservative of an estimate than your premium one. All the best and sorry for asking before reading.

    Jim’s last blog post..Axcelis Technologies, Inc. (NASDAQ: ACLS)

  • Jim

    @Jae: “One tip is to look at the historical prices and how it fits in with the intrinsic value line. Over time, price follows value so if the historical price of 10 years travels somewhat closely to the growth rate, you’ve found a possible realistic growth rate for the next 5 years or so, not the next year.”

    That is a statement to live by. I try to go back at least 20 years in pricing.

    Jim’s last blog post..Axcelis Technologies, Inc. (NASDAQ: ACLS)

  • @ Jim,

    Somebody pointed out the formula when calculating the ranges in the free spreadsheet is actually incorrect but it turns out to be more conservative. I also dont use the auto calculated growth rate. I always check the historical pricing and then usually apply a growth rate that is slightly lower than the PE.

    So far this method has been fairly accurate for me so I’ll stick to what works until I find a better method.

    Where do you get the information for historical prices of 20 years??

    (Oh and for some reason your comments got deleted so I had to add it back manually. I lost your other comment regarding the Contrarian Value Investing book as I was switching web hosts as well..)

  • Jim

    I never noticed that your “free” DCF was incorrect. I’ll have to go through and look at the math. I’ve created a “stone age” looking DCF years a go and used to use that. As I recall, your DCF matched up with that one fairly well so I’d be surprised if the math was off. Anyway, I’m curious now. What section of it was wrong specifically?

    Although I don’t trust their numbers completely, finance.yahoo.com has historical closing prices of a stock in which many go back 20 sometimes 30 years if the company has been around that long of course. You can get those prices on a daily, weekly, or monthly basis. Very useful when looking at their historical growth correlation.

    As far as David Dreman, I was just mentioning how funny it was that I started reading that exact book “the next generation” around the same time you read it. I found a brand new copy on ebay for $3. Shipping & Handling cost me more than the book did 🙂 Take care.

    Jim

    Jim’s last blog post..Breaking Down the Business Part 1: Axcelis Technologies, Inc.

  • The error in the calculations have to do with the multi-year calculation.
    e.g. in the 5 yr DCF spreadsheet, to calculate the shareholders equity from 2004-2008 the formula should be =IF(AND(F24>0,J24>0),(J24/F24)^(1/4)-1,0)

    But instead of the ^1/4 at the end, the free version may have 1/3 or 1/5. Just need to go through it and check.

    It seems like Google has historical pricing as well. But I’ve only used Yahoo to check the past 10 years data.

  • Jim

    @Jae,

    WOW, I never noticed that. LOL. I certainly know the correct calculation to DCF by hand but I’m lost when it comes to spreadsheet calculations. I would have never caught that. Thank you. On the 10 year DCF, I’m assuming the calculation would be 1/9? Thanks again!

    I rarely use Google for numbers. They’ve been wrong too much concerning their data. For instance, ACLS. They report that ACLS has $71.24 M in cash & equivalents when in fact $8.32 M is restricted.

    As you already know, when doing “detailed” work, always use the “actual” 10-K. I made a post on ACLS, let me know what you think. My writing skills are not the best so hopefully I’ll get better the more I write.

    Jim’s last blog post..Axcelis Technology, Inc. Continuation…

  • Jim

    Disregard my 10 year DCF 1/9 question. I get it now. 🙂 Plus, that was a blonde moment even though I’ve always had black hair 🙂

    Jim’s last blog post..Axcelis Technology, Inc. Continuation…

  • Jim

    @Jae,

    Just checked my Muli-Year numbers and they all look correct.

    Jim’s last blog post..Axcelis Technology, Inc. Continuation…

  • I must have edited it and uploaded the new version. Well if there is no mistake that’s even better. Thanks for checking.

Ready to try Old School Value?

TEST DRIVE THE DEMO TODAY
[checklist-collection]
[checklist-collection]