Investing doesn’t always have to be about high growth or low risk. Sometimes a reasonable risk to reward is what you are after. When I think of investing in three stocks that fit that bill, I’m heavily in favor of L Brands Inc (NYSE:LTD), QUALCOMM, Inc. (NASDAQ:QCOM), and Ford Motor Company (NYSE:F). A little unconventional portfolio, right? Let’s look at these three stocks to see how they fit.
Source: Ycharts
The thesis behind L Brands
L Brands Inc (NYSE:LTD) sells lingerie and apparel in mall locations through its Victoria’s Secret Brand. The company is focused on remodeling its stores, expanding it store footprint internationally, and expanding the Pink brand into its own separate retail chain.
L Brands Inc (NYSE:LTD) trades at a 19.1 earnings multiple (retail apparel companies trade at a 20.9 earnings multiple on average). The company’s somewhat higher earnings multiple is due to the premium associated with the consistent rate of growth the company’s management team has been able to accomplish over the past five years.
The stock is pretty safe. L Brands Inc (NYSE:LTD) has a short-term cash cushion with a 1.434 current ratio, meaning the company can afford to pay its short-term liabilities and still have 43.4% left over to pay for whatever emergency situation that may come up.
Analysts on a consensus basis anticipate the company will grow earnings by 11.80% on average over the next five years. The company also offers investors a 2.41% dividend yield (10-year treasuries have 2.01% yield currently).
Semiconductors offer astounding value
QUALCOMM, Inc. (NASDAQ:QCOM) is another favorite on my list. Qualcomm is in the business of licensing its semiconductor technologies to any mobile phone manufacturer. The company is heavily focused on mobile solutions. This involves antennae technologies like the QUALCOMM, Inc. (NASDAQ:QCOM) LTE Advanced (Global 4G solutions) along with mobile chipset solutions like the Snapdragon processor based on the ARM chip design.
The company is projected to grow earnings by 18% on average over the next five years. The company also trades at an 18.1 earnings multiple, which implies that the company’s growth is fairly priced into the valuation of the stock. The stock comes with a 2.18% dividend yield in order to compensate investors for the risk. The company’s 3.1 current ratio implies that the company is safe from any short-term cash needs.
The growth is undoubtedly healthy as IDC estimates that the markets for smartphones will double between 2012 and 2016 to 1.4 billion units annually. Gartner also estimates that the tablet market will grow from 125 million units in 2012 to 375 million by 2016. The growth in mobile computing is advantageous for QUALCOMM, Inc. (NASDAQ:QCOM) shareholders as QUALCOMM, Inc. (NASDAQ:QCOM) remains one of the primary suppliers of chipsets and antennae for smartphones.
Fords are built tough
Let me reiterate how much I like this American car company. The turnaround efforts by CEO Alan Mulally have been phenomenal. Demand for durable goods has been on the rise, which has helped America’s favorite auto company report revenues of $22.3 billion in the first quarter of 2013 versus the $18.6 billion in revenues from the year-ago period (20% year-over-year revenue growth).
The company gained market share within the United States from 15.2% in 2012 to 15.9% in 2013. The growth in market share was due to the company’s increased sex appeal to customers. Perhaps that’s an exaggeration, but the company has done a better job of designing more attractive cars and has continued to build on the impression of a more luxurious automotive experience for its entry-level Ford Motor Company (NYSE:F) brand.
The company is projected to grow earnings by 10.97% on average over the next five years. The company trades at a 10 times earnings multiple, which is reasonable in light of the projected growth. The company also offers its investors a 2.7% dividend yield.
Ford Motor Company (NYSE:F) probably has the safest balance sheet of the three, as the company has a 2.789 current ratio meaning that the company has 178.9% cash left over after paying for all short-term liabilities.
Conclusion
I focused on three companies that are likely to grow at reasonable rates and will not betray an investor’s bank account by losing money. Ford Motor Company (NYSE:F), QUALCOMM, Inc. (NASDAQ:QCOM), and L Brands Inc (NYSE:LTD) are known for having strong management practices.
The companies are cyclical which makes them a poor investment during an economic downturn. However on the upside, investing into cyclical names during a period of economic expansion will contribute even further to an investor’s return on investment.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford and Qualcomm. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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