The keywords from the above headline aren’t “blue-chip stocks.” No, the keywords are “shy blue-chip stocks.”
What exactly is a “shy” blue-chip stock? That’s a good question.
Investopedia defines blue-chip stocks as follows:
“A blue-chip stock typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is more often than not a household name.”
So, if it’s a household name, how can it be shy at the same time? Another good question.
I would say that it has to do with volume. Of the current S&P 500 stocks, only 32 have a market capitalization of $200 billion or higher. In terms of volume, according to Finviz.com, Apple (NASDAQ:AAPL) is number one with over 35 million in average volume; all but four have an average volume of more than 1 million.
However, if you exclude mega-caps and restrict your search to S&P 500 companies with market caps between $10 million and $200 million, you get 105 with a volume less than 1 million and 28 under 500,000.
I’m going to try to find my shy blue-chip stocks from these two cohorts, and especially the latter one, if possible.
- Pool Corporation (NASDAQ:POOL)
- Sherwin-Williams (NYSE:SHW)
- Five Below (NASDAQ:FIVE)
- FEMSA (NYSE:FMX)
- Raymond James Financial (NYSE:RJF)
- Ameriprise (NYSE:AMP)
- United Rentals (NYSE:URI)
- Mohawk Industries (NYSE:MHK)
- Loews (NYSE:L)
- Whirlpool (NYSE:WHR)
Shy Blue-Chip Stocks to Buy: Pool Corporation (POOL)
5-Year Total Return (annualized): 32.5%
Avg. Volume: 361,880
Of all the names of blue-chip stocks on my list, Pool is probably the least known by households. Unless, of course, you own a pool. Then you probably have an excellent understanding of its business model.
You might not be familiar with POOL, but I’ve known it for years. In May 2012, I recommended five consumer discretionary stocks to buy. Pool was one of them. It’s up 841% in the nine years since. Not bad.
So, why should you pay 3.5 times sales when the five-year average is 2.4 times? Because Covid-19 taught us that pools never go out of style, and they can be absolutely relaxing at a time when social contact isn’t a priority.
Over the past two years, Pool has grown its free cash flow (FCF) by 322%. Its trailing 12-month (TTM) FCF is $380 million. In 2012, it was $102.8 million. That’s a compound annual growth rate of 17.8%.
Pool wins the S&P 500 diamond-in-the-rough award. No stock does more while staying under the radar.
5-Year Total Return: 20.3%
Avg. Volume: 483,670
I’m a fan of Sherwin-Williams, so the fact that its president and COO, David Sewell, resigned from his position on March 1 to become CEO of another company outside the coatings industry is distressing. Sewell worked at the company for 14 years. He will be missed.
However, companies with track records this good have a succession plan firmly in place. In the company statement, Sherwin-Williams stated that the company wouldn’t fill the COO role immediately. In the interim, CEO John Morikis will cover Sewell’s duties.
If Morikis is half the leader I think he is, he’s extremely happy for his number two taking the top job somewhere. Confident leaders prepare their direct reports for greater responsibilities. SHW will be fine.
In the latest 12 months ended Dec. 31, 2020, Sherwin-Williams had FCF of $3.1 billion, 56% higher than a year earlier. Yet, its enterprise value only increased 14% over the past 15 months to $73.2 billion from $64.2 billion at the end of 2019.
It’s cheaper than it’s been in more than two years.
Five Below (FIVE)
5-Year Total Return: 37.6%
Avg. Volume: 821,530
Next on this list of blue-chip stocks is Five Below. At the same time the discounter reported Q4 2020 earnings on March 17 — revenues and earnings were 24.9% and 12.3% higher, respectively — it also told analysts that it plans to expand its Five Beyond “store-within-a-store” concepts to 30% of its total footprint by the end of 2021.
“The emergence of Five Beyond from our Ten Below tests is a great example how we pivoted to play offense,” CEO Joel Anderson said. “The customer has responded positively to our new Five Beyond assortment, which is filled with fresh, amazing value items and new categories to our customers.”
In Canada, Dollarama (OTCMKTS:DLMAF) has had great success with higher prices. However, during Covid-19, customers found that prices have gotten too high and told the retailer as much. It is now reducing some of its prices.
Five Below will have to be very thoughtful of its pricing. In the meantime, FIVE remains an excellent long-term buy.
5-Year Total Return: -4.2%
Avg. Volume: 510,270
If there’s a stock on this list that’s disappointed over the past five years, Femsa would have to be it.
You wouldn’t think that a company that owns 47.2% of Coca-Cola Femsa (NYSE:KOF), the largest Coca-Cola franchise bottler in the world; owns OXXO, the largest and fastest-growing convenience store chain in Latin America; operates 3,161 pharmacy stores in Mexico, Chile and Columbia; and owns 12.3% of Heineken (OTCMKTS:HEINY), one of the largest beer companies in the world, would have a problem delivering shareholder returns.
But that’s definitely the case. If you took my advice in April 2013 and bought FMX stock, you’d be down almost 40%. It’s easily one of the worst long-term calls I’ve made since writing for InvestorPlace.
Why go back to the well?
Its TTM FCF is $1.78 billion, more than double what it generated two years ago. Based on an enterprise value of $33.2 billion, it has an FCF yield of 5.4%. That might seem like a value proposition, but it’s much lower than the multiple you would have paid two years ago.
The time to buy Femsa is now.
Raymond James Financial (RJF)
5-Year Total Return: 20.2%
Avg. Volume: 787,240
One of the best financial advisors I’ve ever had the opportunity to talk about the markets with is Chris Raper, who’s based out of Victoria, British Columbia. Raper just happens to be a financial advisor for Raymond James’s Canadian unit.
He and his team do all their own research. Its proprietary investment process focuses on income generation. Everything he buys generates income. His Rent Cheque (Hey, Canadians spell it differently) philosophy makes his clients proud.
I mention Chris because the entire Raymond James organization is independent. After all, advisors are free to take any approach that grows business while doing what’s right for clients.
In the process, shareholders have done just fine over the long haul. Year to date, however, is where RJF stock is ripping it up with a total return of 24.3% as of the time of publication.
At the end of January, the company reported record first-quarter revenues of $2.22 billion, 11% higher than a year earlier and 7% higher than Q4 2020. On the bottom line, it had an adjusted net income of $314 million, 17% higher than a year earlier and 26% higher than Q4 2020.
Based in Florida, I guess it doesn’t get the coverage New York firms garner. But who cares as long as it delivers for shareholders?
5-Year Total Return: 19.4%
Avg. Volume: 756,770
Like many financial services firms, Ameriprise figured out how to make money during Covid-19. While its adjusted operating earnings in fiscal 2020 fell by 19% to $1.77 billion, its assets under management and administration exceeded $1 trillion, a record amount for the company.
In 2020, it had FCF of $4.48 billion. Based on an enterprise value of $24.6 billion, Ameriprise has an FCF yield of 18.2%. Don’t get too excited. FCF isn’t a big metric when looking at financial services companies. Nonetheless, all three of its primary operating segments increased revenues in 2020, so it must be doing something right.
In 2020, the company returned $497 million to shareholders in dividends and another $1.44 billion through stock buybacks. It paid an average price of $158.17 a share. Based on its current share price, it’s generated a 44% return on investment over the past 15 months.
Yielding 1.8%, Ameriprise is an excellent long-term holding if you’re looking for blue-chip stocks.
United Rentals (URI)
5-Year Total Return: 38.1%
Avg. Volume: 749,350
Maybe it’s just where I live in Halifax, Nova Scotia, which is experiencing a tremendous surge in construction. Still, I’ve seen United Rentals’ stickers on the side of all kinds of large equipment, including scissor lifts and aerial booms.
I’m sure the same thing is playing out in all kinds of places across the U.S. and Canada. How else do you explain a 331% total return over the past year? Naturally, given such a gain, the valuation has gotten a tad frothy.
URI has a five-year average price-to-sales (P/S) ratio of 1.54. Its P/S is currently 2.7, or almost double its five-year average.
Perhaps that’s why Barclays analyst Adam Seiden recently left his United Rentals rating at “underperform,” while raising its 12-month price target to $255 from $190. Trading at $302 as I write this, the stock could be ready for a fall.
The way I look at it, United Rentals’ FCF has never been better. At $1.5 billion in 2020, its FCF as a percentage of revenue is 17.6%. Should that fall back to more historical norms in 2021, load up the truck and buy some more.
URI stock will not go out of fashion over the long haul. People need what it’s got. Simple as that.
Mohawk Industries (MHK)
5-Year Total Return: -0.51%
Avg. Volume: 534,770
If you exclude the flooring and carpet maker from consideration merely because of its five-year annualized total return, you’ll be making a big mistake. Up 210%, including dividends, over the past year, analysts are getting very bullish about its earnings potential.
In the upcoming quarter, analysts expect Mohawk to earn $2.80 a share, almost 70% higher than a year earlier. More importantly, that estimate’s increased by 28% in the past month alone. Five analysts have upped their estimates. For all of 2021, the estimate is $11.96 a share, 35% higher than in 2020.
Everything about the world’s largest flooring company sings at the moment. It’s got a strong balance sheet with net debt of 1x EBITDA (earnings before interest, taxes, depreciation and amortization) and plenty of liquidity with more than $3.1 billion in cash and credit facilities.
The global tile market is estimated to be 136 billion square feet. Mohawk has just 2% of this market, leaving plenty of room for growth.
In 2020, Mohawk had FCF of $1.3 billion or 13.5% of its $9.6 billion in revenue. That might not be as good as United Rentals, but it’s better than it’s ever been. As a result, its current FCF yield is 9%, based on an enterprise value of $14.6 billion. Anything above 8% is in value territory.
5-Year Total Return: 6.4%
Avg. Volume: 984,620
Next on my list of blue-chip stocks to buy is Loews. The family-controlled business generates a big chunk of its earnings from its 89.6% ownership stake in CNA Financial (NYSE:CNA), a large property and casualty insurance business.
On March 12, Loews announced that GIC, Singapore’s sovereign wealth fund, would buy 47% of its Altium Packaging subsidiary for approximately $940 million. The deal, which values the entire company at $2 billion, will enable the packaging company to continue its growth strategy through acquisitions. The sale provides Loews with a $490 million pre-tax gain.
As is the company’s style, it will recycle the cash into its existing operating businesses, share repurchases and future acquisitions. It’s repurchased 63 million Loews shares in the past three years, reducing its share count by 19%. In 1969, Loews had 1.3 billion shares outstanding. Today, it has 269 million, or just 21% of its original share count.
Based on a current market cap of $14 billion for the entire company, if you back out $11.2 billion for its CNA stake and $1.6 billion in net cash ($1.2 billion in net cash plus $387 million in after-tax income from Altium sale based on 21% tax rate), its 100% ownership of Loews Hotels and Boardwalk Pipelines and 53% of Altium Packaging are valued at just $1.2 billion.
Long term, that’s going to increase in value.
5-Year Total Return: 4.1%
Avg. Volume: 742,140
As I write this, I’m doing some laundry with a Whirlpool washer and dryer. Tonight, when I turn on my dishwasher, it too will be a Whirlpool. I’ve never had a problem with the company’s products.
And yet, it has an earnings yield of 6.5% (the inverse price-to-earnings ratio, or P/E, is 15.4x) based on 2020 FCF of $1.1 billion and an enterprise value of $17 billion. Anything between 4% and 8% in my books is considered growth at a reasonable price.
The company recently presented at Raymond James’ 42nd Annual Institutional Investors Conference. Several points stand out in its presentation.
First, on pg. 3, Whirlpool notes that it has five brands with $1 billion in annual sales and that it is number one in market share in six of the 10 countries where it operates. That’s domination.
In North America, it’s grown its EBIT (earnings before interest and taxes) earnings on a compounded basis by 20% annually since 2008.
In 2021, it expects to grow sales by 6%, twice its long-term goal with FCF at least 5% or more of those sales due to further margin expansion. Long term, Whirlpool will use three levers for growth: direct to consumer, international expansion and greater cost efficiencies.
Currently yielding 2.3%, Whirlpool’s payout ratio is a low 30% of its TTM net earnings, making it a great choice among blue-chip stocks.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.