Making a stock pick that only has a year to play out isn’t much like the buy-and-hold strategy practiced by Warren Buffett. Nor is it too similar to swing-trading weekly options based on short-term momentum and technicals.
Everyone has their own brand of investing, but for me, a one-year competition like InvestorPlace’s annual Best Stocks contest calls for a mix of value investing and momentum trading, loosely speaking.
The value part is important because it always helps to have a margin of safety, and the momentum part is important because you’ve only got 12 months to get this thing right and stick it to the other nine contestants — so you had damn well better be tuned in to Wall Street’s psyche.
That being said, I’m making Snap-on Incorporated (SNA) stock my pick for the Best Stocks for 2016 contest, for a number of reasons, including …
- SNA boasts robust fundamentals and a strong corporate history.
- It has been a consistent outperformer for years now.
- Advancements in technology and changing consumer behaviors are on its side.
Let’s take a look at what Snap-on is, and what you’ll be getting with SNA stock:
Snap-on: The Basics
First incorporated in Wisconsin in 1920, Snap-on has been around for nearly a century. It manufactures and markets tools and diagnostic equipment for a variety of industries. Its power tools are used widely in the automotive space, but it’s also diversified across the aerospace, mining, construction and energy areas.
At a valuation of just under $10 billion, SNA is a premier mid-cap stock, trading at a very reasonable 21 times earnings. It pays a modest 1.4% dividend and has been dishing out income to investors for 304 consecutive quarters.
Snap-on also has financing programs for its customers; auto mechanics are rather fond of financing, doing so with 95% of their tool purchases, and SNA commands a third of that market.
While sales have risen 6.8% annually for the last five years, earnings have risen at nearly quadruple that pace, soaring 25.2% per annum over the same period.
That’s a trend that should continue into the future due to one of the five core components of its “Value Creation Processes”: rapid continuous improvement, or RCI. Gross profits have been increasing in recent years primarily due to higher sales and savings from RCI initiatives, and its earnings have grown at three times the rate of sales over the last 10 quarters.
Moreover, as cars become more complex, they increasingly contain higher-tech electronics and sensors, and different materials. Translation: More advanced tools and diagnostics will also be needed.
Does Snap-on stock have a chance of doubling in 2016? Probably not. But shares are up 25% in 2015 and 200% in the past five years, so it’s clearly on a roll, and it clearly has the ability to churn out significant stock appreciation. Upside of another 20% or so isn’t out of the question.
As a well-run company trading at a reasonable price, SNA stock has enough insulation to prevent it from any big downside in 2016, and even in a slow-growth economy like today’s, it should perform quite well.
A mixture of value and growth, Snap-on is the perfect stock for 2016’s competition. And it’ll happily sell its wares to anyone else who wants to fix their pick.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at email@example.com.