One of the most difficult things for retirees to do is balance their nest egg between providing reliable income, while also lasting for potentially decades. After all, most retirees are going to live into their 80s, so it's a good idea to allocate a portion of of your portfolio into stocks so you can benefit from the prospects for long-term growth that can really add up when you may need it the most: later in life. This is especially true with lower interest rates meaning that fixed income investments may not generate as much money as you'll need earlier in retirement.
Three of our contributing investors think retirees should consider these value stocks for their long-term portfolios: General Motors Company (NYSE: GM), TJX Companies Inc (NYSE: TJX), and Meritage Homes Corp (NYSE: MTH). While value is a big part of the equation -- all three stocks trade for solid discounts to the market and to their own recent multiples -- there's a lot more to like: They're also great businesses with solid prospects that investors are overlooking today. To paraphrase investing legend Warren Buffett, these look like great chances to get greedy while the market is being fearful.
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Hit the gas on your portfolio
Dan Caplinger (General Motors): It's hard to find an industry with cheaper valuations right now than the automotive sector. Coming off of what some see as the top of the business cycle, investors anticipate drops in earnings in future years, and that has earnings-based valuations for automaker stocks at ridiculously low levels. General Motors currently trades at just seven times forward earnings estimates, and that even takes into account an anticipated decline in GM's bottom line in 2018 compared to adjusted 2017 numbers.
Yet smart investors aren't counting General Motors out just yet. The company has some ambitious plans for 2018, including the production of a new pickup model late in the year, a new Cadillac crossover vehicle, and a model bearing the popular Blazer name that's intended to go up against GM's primary U.S. rival in the mid-sized crossover space. New electric vehicles for GM's lineup could also arrive as early as this year, although some see those launches lagging into 2019.
Regardless, General Motors has done an excellent job of managing the slowing pace of automobile sales. With experienced leadership that's demonstrating an ability to navigate choppy conditions in the industry, GM has just the things many value investors want to see in a good stock prospect.
Sidestepping the retail apocalypse
Brian Feroldi (TJX Companies): Scores of retailers have found it impossible to compete in the digital age, which has lead to waves of store closures and a slew of bankruptcies. However, even in these changing times, retailers with differentiated business models can continue to thrive. A great example of this principle in action is TJX Companies.
TJX is an off-price retailer that owns many brands you are likely familiar with (TJ Maxx, Marshalls, HomeGoods, HomeSense, and more). The company's business model is to buy directly from brand-name manufacturers that have too much inventory on hand. This fact allows TJX to buy merchandise in bulk at a steep discount. The company then passes along the savings to its loyal customers.
This unique sourcing model creates a win-win-win scenario for all involved. Manufacturers get to move excess inventory off their books in one fell swoop, consumers get quality products at a discount, and TJX gets to pocket the difference.
Beyond the savings, another factor that encourages repeat customer visits is the company's "treasure hunt" shopping experience. This atmosphere has trained customers to buy something immediately whenever they see a bargain item. If they don't, then they might not ever get a chance to buy that item again.
These factors help TJX provide a shopping experience that cannot easily be replicated by online or offline competitors. In turn, TJX has had no problems lobbing up profitable growth in these changing times.
Despite these differentiators, TJX's stock has underperformed the S&P 500 over the last 1, 3, and 5 years, largely because of its association with the retail sector. This is allowing investors to buy TJX's stock for about 17 times next year's earnings estimates today. This Fool thinks that's a bargain.
A cheap way to profit from a big trend
Jason Hall (Meritage Homes Corp.): One of the risks of owning a cyclical business like homebuilding is that it's difficult to predict the ups and downs that can turn a profitable investment into a money-loser in the short term. But the upside, especially for a well-run builder like Meritage Homes, which is focused on the best growth segment in housing, is that it can really pay off over the long term. And even retirees should plan to invest a portion of their portfolios for long-term growth.
Meritage Homes' has undergone a strategic shift toward entry-level homes recently, and it's paying off. Home sales are accelerating, margins are getting better, and it's boosting the bottom line. With plans to build even more communities aimed at millennial first-time buyers -- the biggest and fastest-growing segment of housing -- management expects its pre-tax earnings to climb by double-digit rates again in 2018. With less than half of last year's home sales made to first-time buyers, there's substantial room to expand its market share and profits in this segment for years to come.
Meritage stock trades for just over 9 times 2018 earnings estimates, a solid value for a company that's on track to generate double-digit earnings growth. While it's not an ideal short-term investment for retirees, it's an excellent value for the growth potential, as long as you can buy and hold for multiple years and benefit from the strong demand for new starter homes, while riding out any short-term disruption.
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Brian Feroldi has no position in any of the stocks mentioned. Dan Caplinger has no position in any of the stocks mentioned. Jason Hall owns shares of General Motors and Meritage Homes. The Motley Fool recommends Meritage Homes and The TJX Companies. The Motley Fool has a disclosure policy.
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