Every stock carries some amount of risk. Some companies, while seemingly successful today, may not even exist 10 years from now, destroyed by excessive risk-taking. Dramatic meltdowns happen, and investors left holding the bag can suffer greatly.
Continue Reading Below
Companies that are unlikely to suffer this kind of collapse in the long run are often the least risky, as long as valuations are reasonable. These companies generally enjoy durable competitive advantages that insulate them, at least partly, from competitive pressures. A few of our Foolish contributors have come up with three low-risk stock ideas that fit the bill.
Matt DiLallo: Pipeline stocks have turned out to be riskier than investors initially thought. But that's largely because some MLPs used too much leverage and paid out too much of their cash flow than was prudent. While that's tarnished the reputation of the sector, investors shouldn't rule out MLPs altogether. There are still some great investments in the sector, including Enterprise Products Partners , which is low risk thanks to its strong balance sheet and cash flow metrics.
Enterprise Products Partners has been much more financially conservative than most of its peers over the past few years. Instead of paying out all of its cash flow via distributions like the bulk of its competitors, Enterprise typically retains a large portion of its cash flow. In fact, it has retained $4.8 billion of distributable cash flow over the past five years, which it used to fund growth projects instead of issuing additional debt and equity to fund that growth, like most MLPs.
This practice has enabled the company to keep its leverage in check, with the company's leverage ratio averaging less than 4.0 times debt-to-adjusted EBITDA over the past five years. That's a much more conservative ratio than the 4.0-plus-times debt-to-EBITDA at most other MLPs. It's also a big reason Enterprise Products Partners has maintained a very strong credit rating, with its Baa1/BBB+ ratio being one of the highest ratings in the sector, enabling it to continue to borrow money at vastly lower rates than its weaker peers.
While some MLPs have turned out to be riskier than investors were expecting, Enterprise Products Partners isn't in that group. Instead, it's a low-risk investment with a strong balance sheet that should enable it to not only weather the current storm in the energy market, but also to continue to grow amid the storm.
Continue Reading Below
Tim Green: Brick-and-mortar retailers may not seem like low-risk investments given the growing threat from e-commerce, but Wal-Mart is an exception. The company's vast scale, with over 11,500 locations worldwide, gives it a major competitive advantage over other retailers. And while the company has fallen far behind Amazon.com in terms of online sales, Wal-Mart is ramping up its e-commerce investments, including initiatives such as online grocery ordering and curbside pickup.
Wal-Mart's results have been hit by currency issues, but sales have been growing on an adjusted basis. During the fourth quarter of fiscal 2016, sales rose 2.4% in the U.S. and 3.3% in international markets. The e-commerce business is still dwarfed by Amazon, but Wal-Mart plans to invest more than $1 billion in e-commerce this year. The company is taking a more measured approach compared with Amazon's breakneck spending, but Wal-Mart is more serious about e-commerce than ever before.
Wal-Mart's profits have been declining recently thanks to investments the company is making in higher wages, better training, and e-commerce. Earnings slumped in fiscal 2016, and another earnings decline is expected this year, but Wal-Mart aims to return to earnings growth in fiscal 2018. Based on last year's numbers, shares of Wal-Mart trade at about 15 times earnings. While that's not a no-brainer bargain, the valuation is reasonable, and the company's competitive advantages make Wal-Mart a relatively low-risk option for investors.
You might think the last place to look for a low-risk stock would be the biotech sector, but I can't help thinking that at today's prices, biotech giant Gilead Sciences qualifies. The company sports a trailing P/E ratio of 7 and offers a 2% dividendyield. With numbers like that, you might assume the business is fallingapart, but I think there's reason to believe the opposite is true.
What has the market so scared right now? Gilead's cash-cow hepatitis C drugs Harvoni and Sovaldi are showing signs of weakness, as it appears that a new rival drug is pressuring the company's pricing. In the most recent quarter, sales of Harvoni and Sovaldi came in at $4.2 billion, downabout 10% worldwide, but the drop was far more pronounced inthe U.S. That has investors worried that the gravy train is over and that it's all downhill from here.
While I admit that the data point is troubling, I sill think there are reasons to beoptimistic The company's new HIV/AIDS drug, Genvoya, is off to a solid start, and Gilead has another next-generation HIV drug, Odefsey, coming to market soon, having recently won regulatory approval. More importantly, the FDA is set to rule on Gilead's new hepatitis C combo drug on June 28. If approved, it will treat all six hep-C genotypes in one pill. That could offer a major advantage over other hep-C drugs,especiallyin emerging markets, and it could easily cause the company's hep-C revenue to start growing again.
In the meantime, Gilead has been buying back its own shares hand over fist, including $8 billion worth in thefirst quarter alone. It share count dropped 10% over the year-ago period, and the board just authorized an additional $12 billion repurchase plan.
Gilead's stock is in a bit of a funk right now, but I think that trailing P/E ratio of 7 gives investors a lot of downside protection. I don't think it would take much good news for the company's stock to start to bounce back, which is why I like Gilead as a lower-risk place to put money today.
The article 3 Top Stocks for Low-Risk Investors originally appeared on Fool.com.
Brian Feroldi owns shares of Amazon.com and Gilead Sciences. Matt DiLallo owns shares of Amazon.com, Enterprise Products Partners, and Gilead Sciences. Matt DiLallo has the following options: long January 2017 $55 calls on Wal-Mart Stores, short September 2016 $67.5 calls on Wal-Mart Stores, long January 2017 $110 calls on Gilead Sciences, and short January 2017 $120 calls on Gilead Sciences. Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Gilead Sciences. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.