Andy Warhol is reputed to have said, "I like boring things."
When selecting stocks these days, investors may want to take Mr. Warhol's statement to heart. While exciting investments – tech and marijuana companies, for example – have provided dramatic returns, research demonstrates that stocks with low volatility and modest but steady growth generally outperform growth stocks in the long run.
Yet even these investments are becoming pricey in an aging bull market, says Hardev Bains, portfolio manager with Lionridge Capital Management in Winnipeg.
"As fundamental value investors, we're looking for businesses that look relatively safe over the long term regarding their underlying business dynamics … that can also be bought at a reasonable price," he says.
"And these are very hard to find right now."
Identifying value-priced companies with long-term earnings-growth track records is a daunting task these days, agrees Diana Orlic, an investment advisor with Harding Cooke Wealth Management Group/Richardson GMP Ltd. in Burlington, Ont.
Still, that does not mean you can no longer find so-called "boring stocks" that are reasonably priced with upside. With that in mind, consider these six tortoise stocks that could ultimately prove more profitable over the long run rather than the fast-moving hares of today.
Morneau Shepell Inc. (TSX: MSI)
Ms. Orlic says Morneau Shepell – as provider of human resources and outsourcing services – continues to demonstrate strong free cash-flow generation and stable earnings before interest, tax, depreciation and amortization (EBITDA). Its business also benefits in a hot economy where labour costs are high. "Companies continue to look for ways to reduce internal HR costs and provide employees services needed in a more competitive landscape," meaning they increasingly look to outsource to firms like Morneau Shepell. Still, the company could face earnings pressure in the event of a recession as employers cut jobs and require fewer of its services. "That being said, as a people business, its cost structure is flexible – as in no plants or limited fixed assets – and it also generates most of its revenue on a recurring basis, which helps" weather hard times, Ms. Orlic adds.
Johnson & Johnson (NYSE: JNJ)
Mr. Bains says the pharmaceutical and consumer packaged goods company has provided its shareholders with steady earnings growth for many years. But "there are some concerns about a tempering of the rate of future growth for a variety of reasons." Among those worries are a slowdown in sales from its consumer products division. The upside is these concerns have caused the company to trade at a more reasonable valuation. What's more, "this company has a great balance sheet, is well-positioned internationally and has a strong competitive position in its various lines of business," he says. Still, Johnson & Johnson could face headwinds to its profitability if demand wanes for its premium-priced brands should consumers opt for generic, less costly alternatives.
Rogers Communications (TSX: RCI-B)
One of Canada's dominant telecoms, it is more "levered to wireless than many of its peers," says Ms. Orlic. That bodes well for continued profitability as mobile technology becomes more dominant. "With next generation wireless on the horizon, the trend toward more wireless-connected devices appears to be a long-term secular technology trend." Its leadership position in this segment of the marketplace also helps to make Rogers' revenues more recession-proof, allowing it to continue its track record of providing investors with a healthy return on capital and an attractive dividend. "A key risk is higher bond yields," she cautions. As a telecom, its share price often takes a hit when yields rise as investors seeking stability and income move back to fixed income, Ms. Orlic adds.
Fairfax Financial Holdings Ltd. (TSX: FFH)
This Canadian-based insurer offers consistent earnings-per-share growth without artificially trying to smooth year-over-year growth. That also means its earnings growth can appear "lumpy," Mr. Bains says. Over the long term, however, "this company has seen impressive growth and significant increases in shareholders' wealth." That's in part due to its management's willingness to sacrifice short-term earnings in the interest of long-term profitability. The downside is this approach can turn off short-sighted shareholders who may choose to sell, which can be bad news for others who could see their stake fall in value. On the upside, this leads to periods where Fairfax is attractively priced for those looking for an entry point.
Manulife Financial Corp. (TSE: MFC)
Manulife's business in Asia offers the Canadian insurance giant a long runway for revenue growth. In turn this should help Manulife continue to generate steadily growing earnings, Ms. Orlic says. "At less than 10 times forward consensus earnings estimates and a dividend yield of over 3.5 per cent, valuations are compelling." Adding to its upside is that Manulife is an early player in Asia, an underserved insurance and investment services market with a large, fast-growing middle class. Like all lifecos, because it offers wealth services and holds market-based assets, it could face significant headwinds in a bad economy, as it did following the financial crisis in 2008/2009. Furthermore, she adds "Manulife tends to be more volatile with equity markets than some of their peers."
Unilever Nv. (NYSE: UN)
A leading provider of consumer staples that include Lipton, Bertolli olive oils and Ben & Jerry's ice cream, the Netherlands-based conglomerate, which trades on U.S. markets, does not have a reputation for providing entirely consistent earnings growth from one year to the next. But Mr. Bains says it is "definitely safe in terms of underlying financial strength and profitability." Like Fairfax, its growth has been uneven but, over all, Unilever's earnings per share have grown since 2009, except for 2011 and 2015. Then again, even in off years, the company has still been profitable, increasing its dividend to shareholders.