Although the classic investor’s mantra is “Buy low and sell high,” strong markets make it hard to find inexpensive stocks to buy low. That doesn’t mean that investors necessarily have to withdraw. Sometimes the best way to make money in the stock market is simply to go along with the prevailing trend. With the S&P 500 surging to all-time highs in the second half of 2013, we used our September Investment Comments to make a case for remaining bullish—“Buy high and sell higher,” if you like.
At the time we named three factors we believed could continue to drive the market higher: 1) better economic growth, 2) Federal Reserve policy, and 3) investor behavior. The economic growth case was the most straightforward. GDP trends seemed to be accelerating, assisted by a torrid housing market which saw selling prices up 12% year-over-year. Federal Reserve policy remained accommodative, with markets beginning to contemplate the eventual wind-down of Quantitative Easing but also seeing very little likelihood of interest rate hikes. Individual investors, meanwhile, were still under-allocated to stocks. Fund flow data showed a steady pattern of investors moving out of bonds and into the stock market. Dividend-paying stocks were the biggest winners, lending credibility to a narrative that investors were simply fed up with low interest rates and turning to stocks as an alternative source of income. We closed our Investment Comments with the following words:
Investors have gotten spoiled over the past few years because stocks were so cheap relative to their long-run valuation trend that most issues were a bargain. In a normally-valued market, like today, making good selections isn’t supposed to be easy. As always there are solidly growing companies at reasonable prices available, and we continue to recommend their purchase.
With the S&P 500 up 17% on a twelve month basis through the end of July (a little less as of this writing in mid-August), investors who continued to bet up the uptrend have indeed been rewarded.
Each month we feature three companies we think are especially interesting and potentially buyable. Let’s take a look back at one feature stock from the September 2013 issue, Stryker Corporation (NYSE: SYK). The Kalamazoo, Michigan medical devices company isn’t a household name, but the industry powerhouse does carry a high degree of recognizance, especially amongst investors. We have followed the stock in the IAS since 1993. A market darling whose shares rose 10-fold between 1997 and 2007, Stryker’s best growth is probably now behind it. The company continues to grow at a somewhat slower pace, however, and we continue to follow it for our subscribers. While we mainly focus on faster-growing companies, we also like to carry a few veteran growth names on our roster to give subscribers some opportunity for diversification. When we profiled Stryker in September 2013 our investment thesis was that the market seemed to be turning toward mature names with steady dividends, and Stryker was a company which generally fit that bill while also providing visible growth prospects. The dividend was a little low, with the stock priced to yield just 1.5%, but Stryker had ample cash flow to raise dividends over time. In general, we tend to prefer share buybacks and acquisitions over dividends anyway.
Stryker is probably too mature to generate any more explosive growth in the future, but we still liked the risk/reward equation. We were attracted to a potential uptick in sales, rising from mid single-digit growth to high single-digit growth. Buybacks and operating leverage could allow EPS to outgrow sales to the tune of 2%-3%, giving the stock legitimate double-digit earnings growth prospects. We gave the stock a buy-up-to price of $71.
Immediately following our write-up, Stryker acquired MAKO Surgical, which makes robotic devices for assisting in joint surgery. Stryker makes small acquisitions regularly, but with a price tag of $1.65 billion, MAKO was on the larger side—a rare “needle-mover.” Third quarter 2013 results were otherwise unspectacular but were basically in line with our investment case. Sales increased 7% organically. EPS increased just 1% due to some non-operating items. Shares managed modest gains, inching above our buy-up-to price. The fourth quarter showed better progress. Organic sales growth ticked up to 8% with similar EPS growth. 2014 guidance called for sales to be up 5%-6% with EPS up 4%-8%. Those figures were a little bit below our model, especially on the earnings side, but company guidance should normally be a little conservative.
Investors were a little disappointed when First Quarter 2014 results only matched that modest guidance. Management maintained its full-year view, however, and actually raised guidance recently on the back of strong Q2 results. At a recent price of $79.82, plus $1.28 in dividends, Stryker shares have gained 14% since our write-up. That’s similar to the S&P 500’s twelve-month gains as of early August. No fireworks from this one, just solid gains in a resilient market.