At last week's Morningstar conference I attended a session called "Putting cash to work." I confess I assumed that the focus would be on liquid investments with more generous yields than those you can find from bank products. I thought it might provide some ideas on how to generate retirement income.
But instead the focus, for the most part, was on good stock values. An exception: Analyst Heather Brilliant spoke highly about the bonds of Zimmer Holdings, a company that manufactures orthopedic hips and knees among other things. Its bonds offer a yield of 4.2 percent. After doing both the equity and credit analysis, she determined the bonds to be a good risk because of the firm's low leverage, wide economic moat, low business risk, strong cash flow cushion and high credit rating. (Morningstar gives the firm its second-highest rating of AA+.)
Moderator Pat Dorsey added that when Warren Buffett buys corporate bonds, his main concern is if the issuing company will be around in three or four years to pay him back.
Oil spill-related stocks
Most of the other stock picks mentioned in the session offer either strong dividend yields or represent good values. Among the names mentioned were three that have been or will be impacted by the Gulf oil spill. Liabilities for Transocean, the offshore drilling contractor whose stock price has fallen 50 percent since the oil spill disaster began, are expected to be "fairly modest."
Morningstar analyst Paul Larson, who manages two model portfolios called the Tortoise and the Hare, offered some insight on two other stocks. The Tortoise pick: Merchant power generator Exelon sells electricity into the open market. It owns ComEd, based in northern Illinois, and PECO, the largest electric and natural gas utility in Pennsylvania. Exelon should earn about $3.50 per share this year, but Larson says earnings will grow to about $6 per share in four years' time, due to several catalysts, including the drilling moratorium in the Gulf of Mexico which will affect natural gas prices.
From his Hare portfolio, Larson spoke highly of St. Joe, a land holding company in Florida which owns nearly 600,000 acres. The spill induced investors to sell off the stock, and it's down about 40 percent. Why? It owns 15 miles of beachfront property in the Panhandle.
"If their beachfront is spoiled by the oil spill, I think that St. Joe is going to be near the front of the line getting a check from BP for damages, and this actually could catalyze the monetization of this massive land holding. ... Instead of selling it off over the next, say, 10-15 years and getting a check when they sell it off, they may actually get a check fairly soon from BP for the damage. And they're still going to own the land," Larson says.
Larson says the valuation of the stock is quite attractive. "The implied value at the current stock price of around $22 is about $3,600 an acre for their land. ... I think that's just an insanely low price for the portfolio of land that they actually own," he says.
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