7 Strong Stocks to Buy to Avoid Portfolio Overvaluation

stocks to buy - 7 Strong Stocks to Buy to Avoid Portfolio Overvaluation

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The stock market is off to the races, routinely notching new all-time highs from day to day. Tech stocks initially led the charge higher, but now the S&P 500 has rebounded to reach uncharted territory as well.

With these sharp moves upward, particularly in the face of a weak economy, investors are increasingly worried about valuations. That’s a valid concern. But there are still quite a few stocks to buy for your portfolio today.

What does a strong buy look like heading into September? Two categories of companies stand out. The first are firms that are seeing a slowdown due to the novel coronavirus that should end quickly. Despite facing temporary problems, their stock prices remain well below pre-Covid levels.

Second, we have companies that are seeing an increase in business activity thanks to quarantine and work-from-home trends, but whose stock prices don’t yet fully reflect this momentum.

Add it up, and you end up with these seven stocks to buy now:

  • Nasdaq (NASDAQ:NDAQ)
  • Stryker (NYSE:SYK)
  • General Dynamics (NYSE:GD)
  • Reynolds Consumer Products (NASDAQ:REYN)
  • Diageo (NYSE:DEO)
  • Public Storage (NYSE:PSA)
  • Goldman Sachs (NYSE:GS)

Let’s take a closer look at these portfolio powerhouses.

Stocks To Buy: Nasdaq (NDAQ)

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If you’re like many investors, you want to own more tech stocks, but the lofty valuations make you worried. Our first strong buy stock can deal with that problem. The Nasdaq stock exchange is in fact a publicly-listed company which we can invest in.

Nasdaq earns revenues from a variety of sources. There’s trading fees, of course. You also have fees from corporate events such as initial public offerings (IPOs) and secondary stock listings. Nasdaq has a large and rapidly-growing data business where it sells market information to high-frequency trading firms and hedge funds. Also, Nasdaq has some software business related to these other lines of business.

Put it all together and you have a strong buy. Nasdaq serves as a vehicle to profit from the overall tech boom. As more and more companies go public on the Nasdaq and trading activity picks up, Nasdaq will naturally make more profit. And as the market surges, the value of the company’s proprietary data spikes as well. If you view these high-priced tech stocks as a gamble, then Nasdaq is the casino. And as they say, you always want to bet on the house. At just 22x forward earnings, NDAQ stock is an attractive way to play the tech boom.

Stryker (SYK)

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One category of strong stocks to buy right now are high-quality businesses that have sold off due to a temporary revenue disruption. Stryker falls squarely into that camp. The company is a leading producer of medical devices for a wide range of problems.

Stryker has historically been a huge winner, with the share price increasing 600% since the turn of the century. However, shares have stalled out this year. And that’s not surprising. After all, hospitals deferred most elective surgeries throughout much of 2020 thanks to Covid-19. A hip replacement, for example, was not deemed a priority treatment when hospital administrators were worried about a flood of pandemic patients.

Without those elective surgeries, Stryker’s profits have dipped. But, naturally, they’ll come back as strong as ever. You can delay those elective surgeries for a few months, but ultimately they’re going to happen. And with America’s aging population, the demographic tailwinds for medical devices are strong.

People will be spending more and more money to improve their quality of life in their later years, and Stryker will be one of the prime beneficiaries of this.

General Dynamics (GD)

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General Dynamics is another such high-quality company that has sold off on short-term noise. The company, for those unfamiliar, is a leading military contractor. It’s arguably most well-known for submarines, though it makes tanks, munitions, and a wide variety of other such equipment.

That business is sound and recession-proof. The U.S. military is always going to be good for its bills, regardless of what the economy does. And General Dynamics’ contracts tend to play out over many years or even decades, so a short-term political swing won’t destroy the business’ economics either.

However, around 25% of General Dynamics’ sales come from private jets, as it makes the Gulfstream brand. Investors have dumped anything related to aviation thanks to Covid-19. That might not be the right call here though. Private jet travel is a much different thing than commercial flights after all — the infection risk is far lower. In fact, more wealthy people may switch from first class to private jets in their efforts to socially distance away from the masses.

In any case, General Dynamics is now going for just 13x earnings. That’s very cheap for a company that has consistently grown its earnings and dividend payments for decades in a row. General Dynamics is a strong buy blue chip holding right now.

Reynolds Consumer Products (REYN)

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Reynolds Consumer Products isn’t on a lot of peoples’ watchlists yet. But the kitchen products company should be. Reynolds is the maker of its namesake aluminum foil, along with numerous other products for the kitchen. It also produces trash bags, foam plates, and other related items under the brands Hefty and Presto.

What makes Reynolds a strong buy now? For one, it just did its initial public offering in February and thus is under the radar. It is going for just 17x forward sales. That’s in comparison to 25x or more forward earnings for most of the other companies which have enjoyed a strong uplift from panic buying around Covid-19.

Numerous Reynolds products are finding more usage as people become accustomed to cooking at home rather than eating at restaurants. Last quarter, Reynolds grew revenues 4%, even despite it stopping some low-margin store brand manufacturing business. Going forward, it offered upbeat guidance for the full-year thanks to both higher demand and stronger profit margins.

Reynolds doesn’t sell a lot of glamorous products. But the company estimates that its products are found in more than 90% of American households. And with home cooking still on an upswing, Reynolds, which already sells for just 17x earnings, should enjoy strong earnings growth for at least the next year.

Diageo (DEO)

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Sticking with staples, we have British beer and liquor producer Diageo. It makes Guinness beer, along with Bailey’s liqueur, Smirnoff vodka, Don Julio tequila, and many other assorted brands.

The company has also made a splash recently, acquiring several celebrity spirits companies. It famously paid $1 billion for George Clooney’s Casamigos premium tequila a few years ago in a deal many analysts thought was too rich. However, it has paid off. Casamigos posted stunning 68% revenue growth in 2019, keeping up its torrid rate of expansion.

Diageo recently added to that, paying up to $610 million for actor Ryan Reynolds’ Aviation Gin. Aviation is an ultra-premium gin that has been growing at more than 50%/year and accounts for roughly 40% of the entire category growth within the super-premium gin category. In this way, Diageo is adding fresh and fun new brands to its stable of mature proven labels.

As for DEO stock, it’s on sale now. It traded for as high as $180 last year. With bars and restaurants temporarily shut down, Diageo has lost sales momentum, and shares have sunk below $140. However, over the long haul, liquor is a recession-resistant business; alcohol consumption is not particularly tied to economic conditions. Thus, as soon as restaurants reopen, look for Diageo to shoot back up, particularly since at-home liquor consumption figures have been strong throughout the pandemic. Traders have overly-punished Diageo for a very short-term blip in earnings.

Public Storage (PSA)

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Public Storage benefits from two different strong trends at the moment. The first of these is that America is currently enjoying a housing boom. Thanks to the pandemic, people are not satisfied with their living conditions. As a result, plenty of folks are moving. Much of this is from apartments to houses, though many people are abandoning big cities altogether and moving to less populated parts of the country.

When people move, they have to deal with all their stuff. In many cases, folks rent out storage to serve as a third place to keep their belongings while they are making a transition. The storage industry got a boost out of the financial crisis as many people changed their living situations. A similar effect should happen now.

This brings us to the second point; Public Storage is a real estate investment trust (REIT). Most REITs this year have gotten hammered. Whole segments of commercial real estate, such as malls, offices, shopping centers, and student housing are under fire thanks to the pandemic.

Yet many investors rely on REITs for strong dividends. With so much of the REIT universe now being a bad investment, this leaves dividend-seeking investors in a bit of a bind. Fortunately, unlike say malls or offices, storage is enjoying a tailwind due to current economic events. And Public Storage continues to pay its 4% dividend rain or shine. Unlike so many REITs, there’s no discussion of any dividend cuts here.

Thus, there’s an easy path to outperformance for PSA stock going forward as quarterly earnings numbers pick up and investors circle around a strong REIT within a struggling broader sector.

Goldman Sachs (GS)

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Finally, we have Goldman Sachs. Look, I know banks are controversial at the moment. The financial sector obviously bombed out in 2008, and people are worried about a repeat. And sure, some banks will definitely face difficulties this time around as well.

But many banks will be fine, or even do better, as a result of this crisis. Goldman Sachs is in the winners’ circle. Its business is heavily-reliant on investment banking. Thus, all the market activity makes Goldman stand out among the banks. Just as the Nasdaq exchange is riding the rising tide of tech activity, Goldman gets more and more fees as companies use it to launch IPOs, execute mergers and engage in other such corporate activity. Additionally, in strong markets, Goldman’s in-house discretionary traders can generally find more profitable opportunities.

Goldman stock still sells for just 9x forward earnings. Even more importantly, it is selling for a discount to tangible book value. That’s the value you’d get if you sold off all of Goldman’s assets, paid off its debts and wound down the business. It’s extremely rare that GS stock sells for a discount to tangible book. In fact, usually it trades at something like a 30-40% premium to this figure, which implies 50% upside for GS stock as the economy normalizes in coming months.

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 NDAQ, GS, PSA, DEO, REYN, GD, and SYK stock.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/7-strong-stocks-to-buy-to-avoid-portfolio-overvaluation/.

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