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From Greg Wilson, chief analyst, The Legacy Portfolio: They dominate their industries. They have advantages others just can’t match. They gush cash year after year. And they have strong histories of rewarding shareholders through dividends and stock buybacks.
I’m talking about Legacy stocks. They’re the best in the world. And now’s a great time to buy. Below, I’ll show you why, using recent data from J.P. Morgan Asset Management.
Reason No. 1: Profit margins are still at historically high levels.
Corporate profit margins reached a record level in 2012. Since then, the investment community has debated whether profits will “revert to the mean.” That would entail a move back down to the long-term average of 6.3% (from 9.4% in the first quarter of 2015).
But other analysts believe the market has made a structural change. This makes current corporate profit margin levels sustainable.
The outcome will lie somewhere in the middle of these two views. But that still makes Legacy stocks—with their ability to grow earnings to adapt to any business environment—the optimal investment choice.
(The Legacy Portfolio sports an average profit margin of 15.3%.)
Reason No. 2: Corporate profits are growing.
According to FactSet, analysts predict the S&P 500 will earn $126.90, up 5.9% from the year prior.
Peter Lynch once said:
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If you can follow only one bit of data, follow the earnings—assuming the company in question has earnings. I subscribe to the crusty notion that sooner or later, earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction. |
Reason No. 3: Corporations have deleveraged, making them less risky.
Corporate debt is backed up by more equity than ever. Net debt to EBITDA, another measure of corporate health, is at historic lows, too. The corporate debt outlook is the healthiest it’s been in two decades.
Plus, with interest rates still near historic lows, corporations can use debt to fund growth initiatives, buy back stock, and retire debt with higher yields.
Reason No. 4: Corporations have more cash.
Companies in the S&P 500 are sitting on $1.43 trillion in cash, a record high. We like cash. It gives us options. It can be used for internal investment, acquisitions, and to increase dividends and buy back shares. Plus, cash gives you the flexibility to survive downturns.
(Legacy companies, excluding financials, are sitting on over $78 billion in cash.)
Reason No. 5: Reinvestment is the fuel for future growth.
A 2014 McKinsey study ranked the top 3,000 companies by revenue according to the economic profit they produced. It found the top 20% of companies produced over 95% of the economic profits.
A key differentiator was the ability of those top companies to continuously reinvest capital into their businesses. The top 20% reinvested 2.6 times more capital than the rest of the companies.
(Legacy companies, excluding financials, reinvested $53 billion in the last 12 months.)
Reason No. 6: Low interest rates bode well for equities.
Whether stocks move up or down with interest rates depends on the current rate. Today, the 10-year Treasury rate is approximately 2.2%. This chart tells us 5% is the “line in the sand.” With current rates under 5%, we should expect positive stock returns with rising rates.
Reason No. 7: The consumer is worth more than ever and continues to deleverage.
Consumer wealth is 43% above the 2009 low and 21% above the 2007 high. The consumer is wealthier than ever. Further, consumers have seven times more assets than liabilities.
It’s also worth noting household debt payments as a percentage of disposable income are at their lowest levels in 35 years.
Bottom line: There’s plenty of untapped consumer-spending power.
Reason No. 8: Global investors have flocked to bonds since the Great Recession, but the tide continues to turn.
Since 2007, investors have put $1.81 into bonds for every $1 in equities. In 2013, the trend turned towards equities. With current record-low rates, expect the flow to equities to continue.
Reason No. 9: The retail investor is still selling equities, a classic contrarian sign.
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While more funds have been flowing into equities since 2013, the retail investor hasn’t been buying. According to the Investment Company Institute, retail investors dumped $105.8 billion in domestic equity funds from July 2014 to June 2015. Meanwhile, the professionals continue to buy.
Reason No. 10: The current weakness in emerging markets will be noise in the big picture. You want exposure to emerging markets if you’re a long-term investor.
Emerging markets now consume more than the U.S. This long-term trend will be fueled by the growth of middle-class households, with rapid growth expected in areas such as India and China.
Further, emerging markets are poised for tremendous wealth growth as GDPs rise and productivity increases. The U.S was able to grow its GDP per capita from $17,727 in 1961 to $53,143 in 2013. China’s GDP per capita sits at $6,807 today. India’s is just $1,499.
(The Legacy Portfolio, excluding financials, derives over 60% of sales from overseas markets.)
Reason No. 11: Dividends provide a positive return in every decade.
The Legacy Portfolio sports an average dividend yield of 3%, or 50% more than that of the S&P 500. And on average, our Legacy companies have raised their dividends for over 25 consecutive years.
Reason No. 12: Buying at good valuations pays off in the long term.
This chart confirms the importance of valuation. The highest returns correlate to the best valuations.
Subscribers to the Legacy Portfolio never have to worry about overpaying for a stock. That’s because we always monitor our positions and provide you with our buy-up-to prices.
We also provide subscribers with our Legacy Multiplier price levels. The price levels identify different areas of opportunity where you can make outsized returns.
If you’re a long-term investor, now is the time to buy. And Legacy stocks are the way to go.
The Legacy Portfolio is closed to new members right now, but you can sign up for our waitlist here. Mark, Tom, and I will send you updates and educational resources on the strategy in the time before our next open enrollment period.