Balancing your geographical exposure is a core part of investing. Investors are constantly deciding how much money to allocate to the United States, other developed markets such as Europe and Japan and also emerging markets. However, most investors spend far less time considering their diversification within the U.S. But you should pay more attention this factor. And, in particular, it’s time to think about adding more Texas stocks to your portfolio.
With the recent federal tax changes, the calculus has changed. The loss of the state and local tax (SALT) deductions has crushed high-tax states like New York and California. With every loser, there’s a winner. In this case, Texas is positioned to benefit. The state has a huge population base, various major urban centers and a number of leading universities to develop a well-educated workforce.
While Texas may have a reputation for cowboys and energy companies, the state economy has evolved dramatically over the past 30 years. It’s now one of the nation’s powerhouses, and it has leading firms across all industries spanning technology, services and consumer products. Here are seven Texas stocks to put on your radar today:
- Texas Instruments (NASDAQ:TXN)
- Southwest Airlines (NYSE:LUV)
- ExxonMobil (NYSE:XOM)
- Valero (NYSE:VLO)
- Sysco (NYSE:SYY)
- Waste Management (NYSE:WM)
- Kimberly-Clark (NYSE:KMB)
Let’s take a deeper look at what makes each of these Texas stocks promising investments.
Texas Stocks to Buy: Texas Instruments (TXN)
Corporate HQ: Dallas
It’s right there in the name: Texas Instruments is proud of its Lone Star roots. Texas Instruments dates back to 1930 and started operating under its current name and corporate structure in 1951. Over the decades, it developed firsts in key electronic categories such as integrated circuits.
While the company is now arguably most famous for its graphing calculators, it has done business in a wide array of product categories, including video gaming systems, military technology, digital clocks, watches and movie projectors.
And while the TI calculator is its most-known product, the company derives the vast majority of its revenues nowadays from semiconductor chips. It sells the guts of many modern devices. In particular, it focuses on analog semiconductors where there is less competition and far longer product cycles. TXN stock continues to be one of Texas’ biggest; shares have gone up roughly 10x since the Financial Crisis. And there should be more good days ahead.
Southwest Airlines (LUV)
Corporate HQ: Dallas
Also hailing from Dallas, you find Texas’ original local airline, Southwest. Prior to federal airline deregulation in 1978, airlines had to get federal government approval for every single route they wished to fly — and all competitive measures, such as price cuts, needed government oversight as well. As a result, the industry stagnated and flying remained a luxury that only the privileged elite could afford.
Southwest upended this model by using a loophole. Airlines that flew entirely within one state were exempt from federal regulation. Southwest, thus, took advantage of Texas’ large size to build an airline that primarily served the triangle, flying passengers between Dallas, Houston and Austin/San Antonio. Thanks to its scrappy start as an independent carrier, Southwest was poised to dominate once deregulation hit in 1978. And, indeed, it went out and ate the legacy carriers’ lunches, rising from the local Dallas airline 40 years ago to the most successful U.S. airline today.
While the novel coronavirus has hit the company hard, Southwest has retained some of its independent spirit. The company never levered up like most of its legacy peers. As a result, Southwest has the best balance sheet in the industry. This should allow it to remain viable now, and pick up market share as more embattled competitors like American Airlines (NASDAQ:AAL) are forced to shrink. The contrarian low cost airline has more good days ahead of it.
Corporate HQ: Irving
Not long ago, ExxonMobil (NYSE:XOM) was undoubtedly the largest company in Texas, and one of the world’s most important entities. For many years, Exxon’s CEO arguably held more power than the head of the U.S. State Department as Exxon carried out America’s energy policy abroad. Times have changed, however. A glut of oil has both crashed the energy industry domestically and rendered the Middle East less important to global geopolitics. Nowadays, foreign policy is more focused on technology and China.
It’s much too early to write Exxon’s eulogy, however. The International Energy Agency forecasts that under current environmental and development policies, annual oil demand will go up around 10% between now and the year 2040. Even in a rigorous green sustainable development model, oil demand would only drop 30% over the next two decades. All of that is to say that oil isn’t going to be obsolete tomorrow, or even in 20 years.
Yet traders have been acting like oil is already out of the picture. Oil’s crash below $0/barrel earlier this year served as a symbolic — but misleading — example of that. However, if you blinked, you missed it; oil is already back up to $40/barrel now. And with few energy companies exploring now, oil supplies will dwindle in coming years as current reserves are tapped. With oil demand set to plateau or even continue rising for at least the next 20 years, this ensures that oil will have another historic bull market. And Exxon will be right there in the thick of it.
Corporate HQ: San Antonio
Texas has a ton of energy companies. Many of them have seen better days, given the current oil bust. So it would make little sense to fill out the list of Texas stocks with energy stocks. However, we must give props to one of San Antonio’s largest companies, Valero, as it remains uniquely profitable despite the abysmal energy market.
Valero is the nation’s second-largest independent refiner. The company single-handedly transforms a significant portion of the nation’s oil production into gasoline, jet fuel, asphalt and other refined products. In recent years, it enjoyed record profitability thanks to America’s fracking boom. Valero owns many heartland refineries that are located near the biggest oil regions, and thus are enjoying cheap crude oil inputs thanks easy transportation.
While fracking is going bust now, there should still be a glut of cheap continental oil for quite awhile from existing wells. As such, Valero will enjoy a sustained cost advantage — the same one that has powered up its tremendous earnings and dividend growth in recent years. And, unlike oil producers, Valero makes money on the spread between oil and gasoline/heating oil prices, not the price of crude itself. Thus, it can make money in a low oil price environment as long as demand for gasoline and other finished products is high.
All of this means Valero offers nice diversification as opposed to other energy firms, and that’s why it belongs on the list of Texas stocks to consider today.
Corporate HQ: Houston
Please note that this is the “other” Sysco. The famous tech company hails from San Jose, California. However, Houston’s Sysco is an empire in its own right. Sysco is one of the world’s largest food-distribution companies, as it supplies countless restaurants and corporate kitchens around the world.
The company has also been an incredibly consistent performer. With steady earnings growth powering it, Sysco has managed the admirable feat of hiking its dividend for more than 50 years in a row. This makes it one of the country’s few official Dividend Kings.
Shares had one of their worst tumbles in decades back in March. Due to Sysco’s considerable operating leverage and its exposure to restaurants, schools, and corporate kitchens, traders feared the worst. The need for Sysco’s services falls sharply in a prolonged stay-at-home environment. That said, the company is high-quality, and shares quickly recovered. However, you should have this one at the top of your watchlist in case there is a big second wave pandemic sell-off later this fall.
Waste Management (WM)
Corporate HQ: Houston
Waste Management stock has been an absolute home run for long-term shareholders. As I recently documented, WM stock has soared more than 500% over the past 20 years. Once you include dividends, the total return reaches almost 1,000%. It has been a truly stunning performance for the Houston-based disposal giant.
What’s made the company so great? There are only a few major waste collection companies in the U.S. There are high barriers to entry, particularly in terms of building new landfills. With profound local opposition to new sites, the existing landfill owners can charge consistently higher prices for use of their facilities. Waste Management, as the largest individual landfill operator in the U.S., is in the pole position.
Shares briefly dipped on pandemic concerns. It’s true that trash volumes are down for more commercial settings, such as dine-in restaurants. Overall, however, waste has merely shifted rather than disappeared; it’s still a recession-resistant industry at the end of the day. And with another big merger under way, Waste Management should continue to grind out higher profit margins as it controls more and more of the industry. That, in turn, will lead to further stock price gains in the years ahead, making it one of the more appealing Texas stocks to consider in today’s volatile environment.
Corporate HQ: Irving
U.S. paper goods leader Kimberly-Clark was founded more than 130 years ago in Wisconsin. However, after a century of being headquartered there, Kimberly-Clark joined the momentum of companies moving to Texas for the lower taxes and favorable business environment. Kimberly-Clark relocated its headquarters to the Dallas suburb of Irving in 1985 and has remained there to this day.
In Kimberly-Clark, Texas attracted one of the nation’s top recession-proof companies. As we saw during the pandemic, few things are more vital than access to toilet paper and other basic paper products. While Kimberly-Clark’s business isn’t glamorous, it reliably pays the bills.
That has paid off in spades for its shareholders as well. The company has raised its dividend for an astounding 47 years in a row. And with the recent market volatility, KMB stock is now offering a 3% dividend yield once again. This makes it a strong choice for growth and income investors.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned TXN and XOM stock. He also held a short position in AAL stock.