Stocks and Shares

OfWealth’s stock buy list today

The historical evidence is clear, across all countries. Stocks are a great place to invest for your future. Except in very rare cases, just buying a stock index and waiting a long time will result in solid returns. But the best results come from being highly selective. That’s what I do with my recommendations. They’re all performing strongly so far, despite volatile markets in recent months. I’ll explain why.

Let’s start with a chart of US stocks (or “equities”) over the ultra long run, as compared with government bonds, treasury bills (a cash proxy) and consumer price inflation.

Since 1900, US stocks returned an average of 9.6% a year. That’s 6.5% real return, meaning above inflation.

The fact that stocks beat bonds, cash and inflation isn’t unique to the US. The next chart shows relative average annual real returns across 24 countries since 1900, where data is available.

Of course, there’s a range of outcomes, subject to past conditions in different countries. But, for the most part, stocks beat inflation by between 4% and 6% a year since 1900.

That said, performance over shorter time periods can be much more variable. Investors that buy high may not make a profit for some time. That’s especially true if there’s a general market correction or crash, from which it will take time to recover. Investors that buy low take on lower risk of short-term price falls, and are likely to get a positive result much sooner. But, either way, prices go up in the long-run.

Whatever the general market conditions, it’s essential to hunt out the hidden gems. These are financially solid companies, with strong cash profitability and good future growth potential. At the same time, for best results, the stocks should be cheap in relation to underlying value.

A stock’s price is observable in the market whereas value is subjective. However, deep-dive analysis can be used to identify stocks that are currently cheaper than their true worth.

Markets are not always efficient at setting prices, but are ruled by sentiment and fashionable lines of thinking. This can lead to massive over- or underpricing of stocks. Homing in on the underpriced ones reduces the risk of suffering big price falls. At the same time, it improves the chances of highly profitable outcomes for the investor.

What makes stocks profitable? The three basic drivers.

There are three basic profit drivers that determine the outcome for any stock investment. These are growth (of company profits), income (cash payouts from the company to shareholders) and value (stock price paid in relation to underlying worth).

That’s why I examine all three elements closely when I’m choosing stocks. I’ve refined it into what I call my “G.I.V. System”. It incorporates scores for growth, income and value upside. Only the very best prospects get past the high hurdle I set.

But enough of theory. How is it working out in practice? Back in November, I launched a new service called OfWealth 3D Stock Investor. So far I’ve made six individual stock recommendations, and add a new one each month.

In recent weeks I received messages from a few interested, but still sceptical, readers. They wanted to know how my recommendations are performing. That’s why I’m laying it out today.

Although it’s only been a relatively short time period, especially for the most recent picks, performance has been strong. This was despite volatile stock markets, with big down legs in January/February and again in March. I believe this is a clear demonstration of the power of my G.I.V. System when put into practice, and the need to be selective and disciplined.

In general, I don’t seek to benchmark against the S&P 500 index of US stocks. The aim is simply for strong returns over the medium to long run. Nonetheless, it’s interesting to see how my recommendations have performed in the context of general market moves, given unsettled markets.

To that end, a chart follows which shows the progress of the S&P 500 over that time. I’ve added markers for when I’ve made my recommendations. By each marker, I’ve added the percentage profit so far in US$ terms, including price moves (all positive) and cash dividends received.

You can see that all recommendations have made a profit so far. I’m most proud of the January recommendation, which unfortunately happened to coincide with the market peak of 26th January. This was a heavily beaten-down stock that I reckoned must be at or near to reaching its floor. It was a true contrarian investment.

Immediately after the recommendation, the market plunged 10%. But this stock actually went up during the turmoil. As of today, the market is down around 5%, but the stock has made a 9% profit.

In fact, all recommendations have made profits so far. This is as negative sentiment has turned more positive, dividends have been increased and paid, and strong profits have been reported.

So what are these stocks? I can’t reveal full details here, as that’s reserved for full members of OfWealth 3D Stock Investor. But I can certainly give you a taste of the companies, and why I like their stocks. Here are some descriptions of the companies, in the order that I recommended them (note that all stocks are easily tradable in US markets):

  • A premium car company with global operations and sector-leading profit margins. It has a substantial business in the fast-growing Asian market and a dividend yield of 4.4%.
  • A long-established life insurance and pension company that’s benefitting from ageing populations in developed countries and rapid wealth growth in Asia. It has a large and expanding US business, but the jewel in the crown is the fast-growing Asian business, which already makes up a third of profits.
  • A global market leader in equipment for renewable power generation. It’s cash-rich and makes big distributions to shareholders, via both dividends and stock buybacks.
  • An entertainment company that runs branded theme parks and other tourist attractions. You’d certainly recognise at least some of the brands. It’s busy expanding further, especially in the US and Asia.
  • A world-class global clothing retailer, with operations split roughly evenly between developed and emerging market countries. It has a fast-growing online sales business, is adding stores, and has no debt.
  • A manufacturer of specialist auto parts for the global car industry. It dominates its niche and owns many technology patents to protect its position. Its products are included in more and more car models. All production is inside the US, but 70% is exported. This makes it a major beneficiary of recent cuts to US corporate taxes.

These companies are all very different. That’s deliberate, to ensure diversification. Also, some of the stocks are more skewed to growth and others to dividend income. But all have elements of both in the profit mix.

Despite the differences, all the stocks share a few crucial things in common:

  1. They all have a solid financial condition, in some cases with zero debt and big cash reserves.
  2. They’re all among the market leaders in their businesses.
  3. All their stocks are trading far too cheaply in my view. Each for a different reason, but all providing significant potential price upside to investors.

The following table provides a little more detail of where things currently stand.

The average return is 7.1% so far. That’s extremely strong over an average holding period of just 106 days, or about three and a half months. Of course, it’s still been a relatively short time since most of these recommendations were made. But the early results are extremely promising – especially given the broad market conditions.

On average for these companies, I’m pencilling in 7% annual profit growth in coming years, although that’s on the conservative side. On top of that, I expect average cash distributions of about 4% a year, at current market prices. Those distributions will also grow over time.

What’s more, when I recommended the stocks, my estimated upside between market price and true value averaged +39%. As things currently stand, there’s still around +29% average upside.

This strong combination of growth, income and value improves the chances of great results for investors. It’s a prudent approach that allows investors to have peace of mind.

Of course, I don’t expect every single stock to work out. But, by the same token, some of the stocks will do better than expected. The point is that there’s every reason to expect them to perform strongly as a group.

I’m currently working on my latest recommendation, which will be released to members of OfWealth 3D Stock Investor before the end of May. I’m really looking forward to sharing it. But first I have to complete my deep-dive analysis and ensure the stock passes my strict screening system. Quality control is paramount.

I know that these kinds of services aren’t for everyone, and I fully understand. But, if carefully selected stock recommendations are of interest to you, then I urge you to check out my service today (with no obligation to pay).

If you’re interested, see the link just below this article. It would be great to have you on board.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com


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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.