Top 3 New S&P 500 Stocks to Buy

These S&P newbies are set to outperform the index

Last week S&P Dow Jones Indices announced that it was deleting Avon Products, Inc. (NYSE:AVP) from the S&P 500 in favor of Hanesbrands Inc. (NYSE:HBI), a company four times Avon’s size. When added on March 20, Hanes will be the fifth new stock for the index so far in 2015.

Avon Products Inc. (NYSE: AVP)It’s turning out to be a banner year for new stocks to buy. But don’t overlook the stocks that were added to the S&P 500 last year. Only 16 stocks were added during the entire year in 2014, but that list includes some real winners for 2015 and even looking into next year.

Who are the winners in this elite group of 16? Here’s a look at my three favorites for the rest of 2015 and into 2016.

Stocks to Buy: Tractor Supply Company (TSCO)

tractor supply company tsco 185Being a retail guy I have to go with Tractor Supply Company (NASDAQ:TSCO), the company whose slogan “For Life Out Here” aptly describes its core customer: recreational farmers, ranchers and others who enjoy the rural lifestyle. Offering a group of products that can’t all be purchased in one trip anywhere else, TSCO has developed a business model that’s tough to duplicate.

Making big news at the end of February, TSCO announced that it was upping its U.S. store count projection from 2,100 to 2,500 while also upping its long-term operating margin by 100 basis points to 11.5%. TSCO has presently has 1,382 stores in 49 states, which means the new plan provides lots of growth for the company especially in the western half of the country.

How has TSCO stock done so far in 2015? It’s up 10% so far, about 10 percentage points better than the index it joined just one year ago. Over the past 10 years, TSCO has achieved an annualized total return of 24% — 16 percentage points greater than the S&P 500.

If there’s a stock that can plow through any economic conditions, TSCO is it.

Stocks to Buy: Royal Caribbean Cruises (RCL)

rcl stockNormally, I wouldn’t put a company like Royal Caribbean Cruises Ltd (NYSE:RCL) on a list of stocks to buy. Its owners’ earnings, as defined by Warren Buffett himself — net income plus depreciation and amortization less capital expenditures — are negative and likely always will be. It’s the nature of the beast, much like the casino and hotel business on land. They’re capital intensive so you had better know what you’re doing.

And RCL CEO Richard Fain definitely does.

When Fain took the helm of the second-largest cruise operator in the world in 1988, RCL had revenue of $520 million. Since then its revenues have grown almost 9% per year over a 27-year period to $8.1 billion. It might not sound like much, but over such a long period of time it’s really quite significant.

Since going public in 1993, RCL stock has achieved an annualized total return of 11.8% — 250 basis points better than the S&P 500. But if you’re not sure about the viability of the cruise business, maybe what Jim Walker had to say in a March 2, 2015 post in Cruise Law News will change your mind.

“The cruise business is like running a crooked bootlegging business in the 1930’s,” says Walker. “There’s no taxes to pay, the feds leave you alone, and the money rolls in by the boatloads. The profits are enormous.”

Executives like Fain make it look easy. It isn’t.

Stocks to Buy: Under Armour (UA)

underarmour ua 185Sticking with my consumer theme, I’m going to go with Kevin Plank and Under Armour Inc (NYSE:UA). Who would have thought when Plank started UA in 1996 while still playing football for the University of Maryland that his t-shirt design would turn into the brand powerhouse that it is today?

Heck, UA only went public in 2005 and by the end of that year it had a market cap of $1.5 billion. Fast forward a decade and its market cap is $17 billion with lots of upside left in the tank. Despite a wildly frothy stock valuation, UA got some love Tuesday from FBR & Co., who upped the price target three bucks to $86.

Why so positive given that UA stock’s enterprise value is currently 38 times EBITDA — more than twice Nike Inc (NYSE:NKE), its much bigger rival?

“We found a stronger-than-anticipated brand preference for UA footwear,” said FBR analysts Susan Anderson and Andrew Schmidt Tuesday in a note to clients. “considering its still-early foray into the footwear market…Based on UA’s brand potential, we expect accelerated growth, as its footwear share should catch up with its strong brand preference.”

NKE who?

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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