Investors are always looking to beat the market. Some of them hold contrarian point of views and use this way to make money. I also have a set of contrarian ideas that are expected to make some money for investors. Both the stocks discussed in detail below belong to the consumer goods sector.
The Clorox Company (NYSE:CLX)
Investment Thesis: The earnings momentum for The Clorox Company (NYSE:CLX) is expected to accelerate, driven by a stronger focus on innovation than in the past, and the end of an investment cycle driving margin expansion. While the company’s growth potential is somewhat limited by its category and geographic exposure, The Clorox Company (NYSE:CLX) continues to grow ahead of its underlying categories, primarily as a result of strong innovation and mix improvement.
The Clorox Company (NYSE:CLX) has established a track record for shareholder value creation by showing capital discipline, not just in terms of cost savings, but also in M&A situations and by carefully prioritizing organic growth opportunities. Clorox’s consistent long-term delivery of top-line and earnings growth is impressive.
Contrarian idea: The Clorox Company (NYSE:CLX) is probably not on investors’ radar screens due to its exposure to mature categories in developed markets. The market overlooks the capacity of this company to accelerate earnings momentum. EPS growth is expected to double from 4% to 8% in the next 18 months, driven by much stronger focus on innovation and margin increase as a result of recently completed capital investment projects.
Key Catalysts: The key data points include monthly market share statistics (such as Nielsen), and evidence that the company is not losing shelf space/market share as a new compacted bleach formulation is introduced. Negative catalysts could include rising oil/gas prices which would affect Clorox’s gross margins negatively.
Valuation: A three year EBIT growth rate of 5%, mid-term FCF growth of 5%, and a perpetual growth rate of 2% is expected from the stock. These estimates are consistent with a forward P/E multiple of 18x, which is in-line with the stock’s current multiple.
Colgate-Palmolive Company (NYSE:CL)
Investment Thesis: The company is expected to deliver industry-leading top line and high quality earnings growth, based on the analysis of Colgate-Palmolive Company (NYSE:CL)’s product category and portfolio mix. 2013-2014 EPS estimates are 2% and 4% ahead of consensus, respectively. The earnings risk seems to be limited due to strong pricing power, relatively low price elasticity in its categories, and ongoing efficiency programs. Valuation is also attractive when compared with global Consumer Products stocks with similar earnings growth profiles.
Contrarian idea: The market is skeptical about the company’s ability to meet its organic growth target of 6%-7% for this year. However, the goal might be achievable, driven by innovation in oral care in developed markets, increased distribution in emerging markets, and a turnaround of the Pet Food business.
Key Catalysts: Any signs of volume growth at Colgate’s Hills division improving should be a positive catalyst for the stock. This is expected by mid -year 2013. Other than that, global oral care market share trends are the most important data points to monitor.
Valuation: An EBIT growth rate of 4% in 2013 and 8% in 2014 and 2015, mid-term FCF growth of 5%, a perpetual growth rate of 3% is expected from the stock. These estimates are consistent with a forward P/E multiple one year from now of 20x, which is in-line with the stock’s current multiple.
Apart from belonging to one sector, and being among the stocks that the market is bearish on (and I am bullish), both these stocks share another thing in common – they provide healthy dividend yields to their investors.
Where Clorox provides a yield of 2.9%, Colgate provides a dividend yield of 2.3%. In this respect, this sector has been a darling for the retirees. Belonging to this sector, Kimberly Clark Corp (NYSE:KMB) is another solid dividend stock, which is preferred as being a part of retiree’s portfolio.
The 3.3% dividend yielding stock has a proven business model and a solid product line that vouches for its dividend’s sustainability. Consistent growth and a smart management has helped the company pull out of a harsh environment where cost of production is continuously rising.
Foolish bottom line
Despite reaching their 52-week highs, both The Clorox Company (NYSE:CLX) and Colgate-Palmolive Company (NYSE:CL) are deemed to go higher given the incremental earnings expected from strong product innovation and growth in new markets.
The article These Stocks Are Buys Even at 52-week Highs originally appeared on Fool.com is written by Zain Abbas.
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