My longer-term macroeconomic analysis which is called the Investment Rate, tells us that we are in the third major down period in U.S. history. The asset bubble we have all been witness to may be beginning to burst.
Markets can be more rational than you honestly think, and while the stock market breaking new all-time-highs is causing alarm bells to ring in the technical analysis camp, the fundamentals remain exceedingly strong at many of these international companies.
Why the market rally is sustainable
Some point to the slow economic growth within the United States and suggest that the broader market rally is going to be unsustainable. However, my experience has been that, after analyzing all 30 Dow Jones Industrial Average (Dow Jones Indices:.DJI) component stocks — with the exception of Pfizer Inc. (NYSE:PFE) and Chevron Corporation (NYSE:CVX) — a lot of these companies have been able to grow their net income by expanding internationally.
This means that these companies are not dependent on the macroeconomic fundamentals of the United States alone, but rather the growth of emerging economies. After all, what works within the United States also works in foreign markets, too. Because of this, companies in the Dow have been able to grow earnings at rates that are far greater than the GDP growth rate. So looking at economic indicators alone doesn’t represent the investment potential in Dow Jones Industrial Average (Dow Jones Indices:.DJI) stocks.
Technical analysts tend to ignore the growth in earnings on these income statements, and having assessed the historical and projected EPS growth across all Dow Jones Industrial Average (Dow Jones Indices:.DJI) component stocks, it seems that the short-term pullback in equities is likely to be short term. Meaning that a super-theory on economics is not going to unhinge the optimism investors have.
Stocks can also trade on earnings per share
The management teams at Fortune 500 companies, especially the ones listed on the Dow Jones industrial average, have been buying back shares for an extremely long amount of time. This helps to inflate the earnings-per-share figure on the income statement through share buybacks and the retiring of those shares.
Share buybacks do not contribute to the economy, but what they do is keep shareholders more happy by making the total number of shares floating on a stock exchange more scarce, causing a bidding frenzy. It also increases the earnings per share figure on an income statement.
Let’s look historically
So a picture is worth 10,000 words. But allow me to summarize what I am trying to illustrate. After assessing the market crash of 1987 to 1988, we can say three things about markets. They pull back, they have dips, and they rally for long periods of time. I believe that the historical pattern of minor dips with long periods of stock appreciation will hold. This means that investors should buy the dip and have a holding period that lasts longer than five years. Chances are very high that the Dow and S&P 500 will continue to rally for an extended period of time.
How to position yourself
Because I am trying to demonstrate stability across larger companies, I am going to focus on three Dow stocks that will continue to grow.
The Procter & Gamble Company (NYSE:PG) continues to roll out its line up of consumer products across the world. The company has been able to grow sales by more than 17% compounded annually since 2002 across Brazil, Russia, India, and China (BRIC) countries. This block of economic growth will continue, and this company is well-positioned to grow in these emerging economies. The company has been able to grow its sales by 2.9% on average over the past five years (mostly driven by BRIC).
The company compensates its investors with a 3.1% dividend yield, which is better than owning Treasury bonds. Analysts on a consensus basis anticipate this company to grow its earnings by 7.2% on average over the next five years. The stock offers a reasonable mix of stability, income, and growth.
Microsoft Corporation (NASDAQ:MSFT) is a compelling investment opportunity. Some question whether or not Microsoft Corporation (NASDAQ:MSFT) can sustain growth in the post-PC era. But I believe that the negativity surrounding computers is overblown and that international demand for Windows PC licenses will eventually stabilize. IDC estimates that from 2014 onward, global desktop and laptop shipments will resume growth at a 1.9% rate.
Microsoft Corporation (NASDAQ:MSFT) has been able to grow revenue from its servers and tools division by 11.2%, which is driven by the adoption of cloud and virtualization technologies. Microsoft Corporation (NASDAQ:MSFT) also saw substantial growth in its entertainment and devices division, which grew by 56.4%. Growth in its entertainment division was sustained through successful additions in XBox live subscribers paired with demand for video games and XBox 360 console devices. This growth is likely to be sustained with the addition of the XBox one.
Going forward, analysts on a consensus basis anticipate this company to grow earnings by 8.7% on average over the next five years. The company compensates investors adequately with a 2.6% dividend yield. Microsoft Corporation (NASDAQ:MSFT) remains a compelling investment for those who want a mix of growth and income in the technology space.
The Coca-Cola Company (NYSE:KO) is a bottling company. The stock comes with the added advantage of being non-cyclical. The company’s mantra of opening happiness is working on a global scale. It hopes to sustain its earnings-per-share growth through a mix of share buybacks, international expansion, and increases in territorial bottling within the United States. The company can also raise the prices on its The Coca-Cola Company (NYSE:KO) products consistently as food products are fairly inelastic (not price sensitive).
Analysts on a consensus basis anticipate this company to grow earnings by 8.9% on average over the next five years. The company trades at a bit of premium with a 21.4 earnings multiple, but it offsets the disadvantages of that high earnings multiple by operating in a non-cyclical sector of the economy. The company compensates its investors with a 2.8% dividend yield. It provides a great mix of stability, growth, and income, which should keep defensive investors happy for many years.
Conclusion
Ignore the market hysteria. Every time stocks have pulled back, there’s always a group of people who peddle the idea that stocks ought to crash in some sort of super-cycle pullback. This has failed to materialize in any of the stock corrections over the past five years.
Owning stocks is the safest bet for capital preservation, growth, and income. Position yourself wisely with these three Dow stocks and you shall profit handsomely in the years ahead.
The article Ignore the Bears and Buy These 3 Companies originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Procter & Gamble. The Motley Fool owns shares of Microsoft. 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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