S&P 500 lists the 500 largest companies in America by Market Capitalization. In this article, I will look at five companies that are all leaders within their industries. They are facing tough headwinds like a still lagging housing market and stiff competition. Yet, their strong performance is being driven by several positive catalysts including highly diversified product offerings and innovation in web based presence. Also, shares of these companies are selling at attractive price levels right now. Based on my analysis below, these companies could potentially bring stability and secure long term prospects to your portfolio. Here is what I found:
Goodrich Corporation (GR)
After close to 10 decades of transformation and dabbling in many industries from radios to tires, GR finally found its feet in the Aerospace and industrial components industry. Pursuant to its divestment from specialist chemicals industry; and strategic acquisitions culminating in the adoption of its current name, GR has become the world’s largest supplier of parts and components therein. Future prospects look bright in light of its relationships with some of the biggest buyers including the US Military, Polish Government and Boeing as evidenced by its receipt of the Boeing Performance Excellence Award, Fly Dubai Recognition of Excellence on its DURACARB carbon brakes among other accolades.
Boeing is set to continue dominating the commercial aircraft market due to its fuel efficiency, in this era where there is continued upward pressure on fuel prices. This will support demand for GR’s products by Boeing. GR is currently trading around $126. This compares favorably with the offer from Unitech Technologies Corporation (UTX) to buy the company at $127.50. However, there has been a significant reduction in the premium at the announcement of the said deal (40% in September 2011). Going forward, there will be minimal growth in demand for commercial aircraft, (commercial aircraft business drives 70% demand for GR), this year due to increased fuel prices and concerns about the global recession. In that light, I recommend GR as a HOLD, with strong long-term prospects.
Home Depot Inc (HD)
Home depot Inc. is the world’s largest supplier of Home improvement goods and services, and America’s fourth largest retailer. The global recession of 2008 and its adverse effects on the housing market dealt a heavy blow on the company. However, the company has since been on a recovery path, growing revenue at 2.5% per annum to date.
HDI is expected to release its results next week. Expectations are high that reported earnings will be 14% higher, year on year. Of concern is the relatively high debt: equity ratio (51.61%). The company is trading around $45, (PE 14%). This is a bit steep, considering that its closest rival Lowe’s (NYSE: LOW) is trading at a PE of around 12%.
Buoying future prospects are the company’s efforts to be at the cutting edge of innovation. Recent developments include the arrangements to run trials with Paypal as well as significant presence online. However, until and unless the housing market fully recovers, this industry and HDI will continue to be dragged by low demand for new houses and renovations as there is a glut of houses on the market. There is safety in the size of the business and I recommend the stock as a strong HOLD.
D R Horton Inc (DHI)
D R Horton Inc. is America’s biggest home builder in terms of volumes of houses. The company, like any other construction industry player, is still reeling from the sub-prime crisis triggered housing market crash.
The company’s sheer size and order book puts it ahead of competitors who happen to be mainly small localized players. The company can leverage on its size to reduce costs of construction and selling prices. The inclusion of a financial services boutique in its stable adds value to the company as a home-solutions provider; so does its geographical spread, with operations in 27 states. The major threats to its future remain the credit market and general economic health. Interest rates have eased off but there is still a lot of upward pressure and defaults. High interest rates and low employment will remain serious challenges in this industry in the short to medium term. I cannot be overly bullish on this stock. It is a HOLD.
Google Inc (GOOG)
Ever since it overtook yahoo in January 2009 as the leading online search engine, google has not looked back. The company has gone on to diversify its product portfolio to include email services (gmail), instant chat (google chat), smart phone applications (android) among others.
A deliberate focus on product development as evidenced by an allocation of a significant 9% of total expenditure to this area in sharp contrast to yahoo’s focus on sales has kept google a step ahead. The company has managed to diversify its product mix, and income streams. Paid for advertising online has been identified as a growth area and google is focusing on that. With this form of advertising taking up less than 10% of total advertising expenditure by US businesses, there is still a lot of growth to be tapped in this market.
Major threats come from social networks like Twitter, Facebook, and MS Bing. However, none of the companies is diversified enough to effectively compete with Google. The stock is currently trading around $610. It is a well diversified stock, driven by innovation and growing demand for internet services. I recommend Google as a BUY.
Goldman Sachs Group Inc (GS)
Goldman Sachs Group Inc. is a US bank holding company. The company has a reputation for consistently performing above market and industry standards. The financial market crisis of 2008 did not leave it untainted though.
The resultant regulation is going to deal a major blow to the company. Of notable concern is the new restriction of proprietary trading in cases where there is material exposure to“to high risk assets,” “conflict of interest,” or “high risk trading strategies.” It remains to be seen how this legislation will be interpreted and implemented but it could significantly curtail the company’s room to profit from proprietary trading. Further, it is planned to limit banks’ exposure to hedge funds; GS is heavily invested therein. The group remains fundamentally strong but the hanging legislative contingencies call for caution. I recommend the stock as a HOLD.
About the author:I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.
I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.