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5 stocks to play it fairly safe

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Tuesday, May 7, 2013, 12:01 a.m.
 

Most investors are torn right now. The stock market's party is fun, so they don't want to leave. Yet, with recession raging in Europe and the federal budget in the United States still a mess, they are tempted to follow an older market saying: “Sell in May and go away.”

I recommend staying in. I believe the economic recovery in the Unitd States is continuing and gathering some momentum. The stock market will decline from time to time, but predicting when those declines will happen is a carnival game. Big declines and advances often surprise even the most seasoned professionals.

If you need an extra measure of safety, consider buying stocks with low debt and above-average dividends. Such stocks usually hold up better than most in a downturn.

Today's column follows in a tradition. In October 1999 and every May from 2000 through 2006, I wrote a column about low-debt stocks. Last May I revived the series, adding the additional requirement of a high dividend.

Those nine columns have produced an average 12-month gain of 37 percent, versus 6.5 percent for the Standard & Poor's 500 Index over the same nine periods. My recommendations were profitable in eight out of nine years and beat the S&P eight times out of nine.

Last year's victory was a narrow one, with my picks up 22.9 percent compared with 21.1 percent for the S&P. J2 Global Inc., which describes itself as a “cloud-based communications” company, was the leader, up 68 percent. Cato Corp., a clothing retailer, was the laggard, down 4.4 percent.

Bear in mind that column recommendations are hypothetical, taking no account of transaction costs or taxes. Column results should not be confused with performance of portfolios I run for clients. And past performance doesn't predict future results.

In my judgment, the results of those nine columns vindicate a low-debt approach. Companies with low debt have strategic flexibility. They can afford to buy troubled competitors, increase dividends or plow money back into the business.

So even though there are times — and 2012 was one — when Federal Reserve easing causes high-debt stocks to do well, I will continue to favor low-debt stocks.

Here are five new ones to consider. They have strong balance sheets, with debt less than 10 percent of stockholders' equity, putting them in the top quintile by that measure. And they offer a dividend yield of 3 percent or better, compared with an average yield of 2.06 percent on the S&P 500.

NL Industries Inc. (NL) was known until 1971 as National Lead. It was one of the original stocks in the Dow Jones Industrial Average in 1896, and its main product used to be Dutch Boy paint (now made by Sherwin Williams).

Nowadays, NL's main products include slides for desk drawers and file cabinets, ergonomic keyboard supports and small locks. The stock is attractively priced at less than eight times earnings.

NL's dividend yield is fat, at 4.4 percent. Tightly controlled by Texas financier Harold Simmons, this small-cap stock is thinly traded. So it's best to buy on days when the market is down. Be aware that you may need to take a haircut on your selling price if you need to get out quickly.

US Mobility Inc. (USMO), based in Springfield, Va., provides messaging services by phone and Internet. It is almost debt-free and provides a 3.7 percent dividend yield. As is the case with NL Industries, almost no Wall Street analysts follow the stock.

Gamestop Corp. (GME), with headquarters in Grapevine, Texas, is the world's largest retailer of new and used electronic games and game equipment. It started paying dividends only last year, but sports a 3 percent yield. After a tough year in the latest fiscal year (ending in January), the company will post a record year this year, analysts believe.

Safety Insurance Group Inc. (SAFT) of Boston sells property and car insurance in the heavily regulated Massachusetts market. The downside is that there's no discernible growth trend in earnings. The upside: The company has reported a profit in each of the past 10 years, offers a 4.7 percent dividend yield, and is debt-free.

Destination Maternity Corp. (DEST), with headquarters in Philadelphia, sells maternity clothes in about 1,000 stores. Brand names include Pea in a Pod, Motherhood Maternity and Destination Maternity. Profits have been erratic, but analysts look for near-record profits this fiscal year (ending in September) and record profits in fiscal 2014.

John Dorfman is chairman of Thunderstorm Capital LLC. Reach him at jdorfman@thunderstormcapital.com.

 

 
 


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