I have a small television in my office tuned to CNBC. I keep the sound off. It's not that I rely on it for information -- rather, I like to have some idea of what the herd is thinking and what they're being told. As always, the whole story isn't being discussed.
First, 2013 brought the type of outsize gains that haven't been enjoyed in many years. Second, many investors are still shell-shocked from 2008-2009, so any volatility whatsoever sends them running for cover. If a low-single-digit pullback makes them nervous, the pullbacks I'm about to discuss might really freak them out.
I've found a handful of high-quality stocks that are trading at an average discount of 16% to their 52-week highs, with an average dividend yield close to 5%. These are well-run companies -- two in high-growth industries -- with strong business models. Held as a basket, all three provide excellent diversification.
|Olin Corp. (NYSE: OLN)|
Olin is one of my favorite stocks. (It's also an old favorite of my colleague Amy Calistri.) That's because the story is so simple: chlorine and bullets. That's what Olin makes -- and makes money doing.
Olin has been in business for over 100 years and operates three business segments -- chlor-alkali chemical manufacturing and sporting and military ammunition manufacturing -- and one of the largest wholesale chemical distribution businesses in the U.S.
The chlor-alkali business represents 54% of sales and produces mainly chlorine and caustic soda. Chlorine is a raw material in thousands of end products: vinyls, water treatment chemicals, bleach and PVC. Caustic soda is also widely used in everything from the pulping and bleaching process in paper-making to cleansers and ice cream.
Ammunition sales make up 30% of Olin's sales. (If you've ever used Winchester shotgun shells or bullets, Olin shareholders thank you.) A third of Olin's ammo sales are to military bodies or law enforcement agencies. In fact, Winchester is Olin's fastest-growing segment: Fourth-quarter sales of $178 million were up 14% from the year before.
Overall, Olin's net income rose nearly 20% last year, to $178 million. For 2014, the company sees softer pricing in the core chlor-alkali business but expects it will be offset by lower input and operating costs.
Currently trading at a nearly 12% discount to its 52-week high, OLN features a forward price-to-earnings (P/E) ratio of 13.2 and a dividend yield of 3.1%. Incidentally, the company has a dividend history of 349 consecutive quarterly payments.
How's that for consistency?
|Vodafone (NYSE: VOD)|
| It's rare that we get an opportunity to purchase a large and growing market leader, flush with cash, close to its tangible book value. But every now and then, as Warren Buffett is fond of saying, the market throws us a fat pitch. International telecom giant Vodafone (which I profiled in September) is trading around $36, about an 8% discount to its 52-week high. Recently, the company profitably sold its 45% stake in Verizon (NYSE: VZ) to the tune of $130 billion, of which nearly $60 billion is cash. Vodafone plans to return some of that cash to shareholders in the form of a dividend. The rest will be used to pay down debt and fund investment in its emerging-markets business. Vodafone has become a trailblazer in rapidly growing frontier markets. Currently, the company's major frontier focus is Africa where wireless phone penetration and other telecommunications products are just beginning to scratch the surface.
The company's long-term debt-to-capital ratio sits at a comfortable 28%, which is low for a large telecom company. VOD has a reasonable forward P/E of 16.7 and a dividend yield of 4.4%.
|Senior Housing Properties (NYSE: SNH)|
|I've profiled this go-to income stock extensively over the past year. Now shares are trading at a nearly 30% discount to their 52-week high. The chart action also looks compelling:
SNH went on sale during the Federal Reserve-induced "taper talk" panic last May. The result was nervous and shortsighted investors punishing interest rate-sensitive stocks such as real estate investment trusts (REITs). The effect of the Affordable Care Act (aka Obamacare) on the assisted-living industry also took a toll on SNH. However, 60% of the company's net operating income flows from private payers. The fact that 10,000 baby boomers turn 65 every day is also a plus for Senior Housing's prospects.
Senior Housing's balance sheet is extremely solid, with a long-term debt-to-capital ratio of just 29%, which is low for a REIT. The recent sale of two hospitals also generated $90 million in cash. SNH currently trades near $21.80, below the company's book value of $23 a share, and yields 7.1%.
I consider Senior Housing Properties a must-own investment, especially in retirement income portfolios.
Risks to Consider: Olin's business is commodity-based and cyclical in nature, Vodafone's heavy investment in emerging markets could be disrupted by recent turbulence, and Senior Housing's business faces significant government and financial market risk. However, all three companies are well engineered financially, with low debt and predictable earnings streams.
Action to Take --> These are high-quality stocks at incredibly attractive prices. Based on their current outlooks, a recovery to their 52-week highs appears likely. Upside surprises in their results should result in market outperformance. Total returns of 25% or more are possible.