Buy These 'Boring' Stocks -- And Then Forget About 'Em

Brad Briggs's picture

Friday, August 28, 2009 - 5:35pm

by Brad Briggs

When the financial meltdown began with the collapse of Lehman Brothers, the talking heads on financial news channels pronounced the death of "buy-and-hold" investing. It had become unfashionable. No one was willing to defend the idea of buying a stock and holding on to it for years.

I don't know who was first to determine buy-and-hold was dead, but he couldn't have been more wrong. The strategy still works for plenty of stocks. Millions of successful investors, from Warren Buffett to Peter Lynch and beyond, have all made fortunes by buying good companies at reasonable prices and holding them for the long haul.

The trick? The companies that make the best candidates for this strategy have to be boring. They should be solid, simple businesses. Nothing fancy.

Here are a few of my favorite yawners:

Company

Return Since
Lehman Collapse
YTD Return 10-Year Return
PepsiCo
(NYSE: PEP)
-19.0% +7.5% +94.6%
McDonald's
(NYSE: MCD)
-8.6% -6.7% +58.7%
Johnson & Johnson
(NYSE: JNJ)
-11.2% +3.9% +50.9%
Kimberly-Clark
(NYSE: KMB)
-3.6% +16.9% +37.1%
Procter & Gamble
(NYSE: PG)
-24.8% -11.6% +35.9%
S&P 500 -15.7% +13.8% -9.1%

These may not be the flashiest companies out there, but these workhorses have done a lot better than many of the show horses. In fact, each of these five stocks has beaten the S&P during the past 10 years. Most of them have outperformed the S&P since the financial crisis began, too.

Another common trait: Cheap valuation.

Company P/E 5-Year P/E Discount
McDonald's
(NYSE: MCD)
14.5 20.6 -42.1%
PepsiCo
(NYSE: PEP)
15.8 20.5 -29.7%
Kimberly-Clark
(NYSE: KMB)
13.4 16.8 -25.4%
Procter & Gamble
(NYSE: PG)
15.3 17.5 -14.4%
Johnson & Johnson
(NYSE: JNJ)
14.4 15.9 -10.4%
S&P 500 19.0 16.4 +13.7%

Here are the two best picks from this list:

PepsiCo (NYSE: PEP)
PepsiCo has everything you could ask of a buy-and-hold candidate: A solid domestic business, growth prospects abroad, good management and a respectable dividend.

The company is well diversified. It has 18 brands that each deliver at least $1 billion in annual sales. And it's not just dependent on beverage sales. The snack division makes up about 50% of its revenue.

Pepsi has been trying to play catch-up on the international front and is making significant progress. The company recently invested $1 billion in Russia, $1 billion in China and $500 million in India. It likely will invest more in these countries going forward.

A diverse product line combined with the upside potential from international growth is what makes Pepsi a more compelling pick than rival Coca-Cola (NYSE: KO). PepsiCo's management has been resilient, using the downturn to make smart moves by shoring up its brands and expanding internationally.

The stock needs to gain +30% just to return to its typical valuation of 20.5 times earnings, but the shares could gain even more down the road as the company's international bets pay off. The real comfort for investors is that with $45 billion in expected sales this year, they can enjoy the upside knowing that PepsiCo isn't going to disappear any time soon.

Kimberly-Clark (NYSE: KMB)
Kimberly-Clark has held up the best of any stock on my list. There's good reason for that: People need diapers, toilet paper, Kleenex and paper towels regardless of what the economy is doing.

Kimberly-Clark, like PepsiCo, is growing internationally. Its products can be found in more than 80 countries. International sales make up 30% of revenues, and they're steadily going up year after year.

Kimberly-Clark's operations generated $2.5 billion last year -- easily enough to fund the $950 million it paid in dividends. The company has raised its dividends payment for 37 straight years.

Kimberly-Clark's share price isn't going to surge like a wild biotech. The company is simple and easy to understand. It may be the most boring stock you ever own. That's a good thing for buy-and-hold investors. Another plus: It's cheap. Kimberly-Clark is trading for a little more than 13 times earnings, a -25% discount to its historical value.

Brad Briggs does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.