One of the best ways to build long-term wealth is by investing in the stock market. Historically, the return on stocks is greater than any other asset class including real estate, commodities, currency, or gold. I have been buying equities since I learned about them at the age of 19 from a class called Investments in college. Buying stocks has been a proven method for me and helped to grow my net worth tremendously. I consistently add shares to my investment portfolio every week. My favorite stocks to buy are those selling at a discount to their true value known as a value stocks. Value stocks are stocks that are selling for a discount to their intrinsic value. It’s like buying stock on sale! Finding stocks on sale has been a challenge recently as the stock market has roared to an all time high. So, where do you look to buy stocks on sale in a high flying stock market?
Find Stocks On Sale
Do a Google search for stocks trading near their 52 week lows. Look for recognizable brand names. Find companies with products that you believe in. A good place to start is the 52 week low list published on Yahoo Finance every day. I search this list weekly for quality companies trading near their 52 week low price. Stocks trading near their 52 week lows are already beaten up and often have all of the negative sentiment of the market already priced in. I try to locate name brand companies with a long operating history, positive free cash flow with solid management teams whose stock price has dropped substantially but maintains the long term possibilities of rebounding.
A possible example of this right now is the Kraft Heinz Company (KHC). Kraft Heinz is a giant food and beverage conglomerate, with over 200 brands. Kraft Heinz has easily recognizable brands such as Heinz Ketchup, Kraft mac n cheese, Maxwell House, Jell-O, Oscar Mayer, Planters, Kool-Aid, Ore-ida, Lunchables, Philadelphia, Velveeta, and more. The company is currently valued at $37 billion dollars and trades for under 9 times this years earnings estimate.
The stock was pummeled early this year when the company reduced its earnings estimate and had to write off about $15 billion in value. The packaged foods industry has taken a hit since consumers have started buying into the fresh, natural foods movement. Kraft Heinz is a sizable chunk of famed value investor Warren Buffett’s portfolio, accounting for nearly $9 billion of it. The stock currently trades for $30 a share after peaking near $100 almost 2 years ago. The company does still carry risk as the SEC are investigating accounting issues regarding Kraft’s accounting practices. Also, margins have declined nearly 25 percent as the company has lowered prices and is shifting its strategy to offer natural food alternatives. Long term debt levels are high with the company carrying over $31 billion of it on its balance sheet.
One of the biggest reasons to buy Kraft now is the dividend. Buying stocks with good dividends are an excellent way of generating passive income. Kraft pays a dividend of $2.79 which equates to a 5.3 percent dividend yield. That’s a 5.8% percent return just for holding shares until the company turns around. The dividend seems to be safe since it is under 60 percent of the earnings generated. The dividend is safer now since it was reduced this past February to a more sustainable level. I remain a believer in the long term sustainability of the strength of Kraft Heinz’s brand portfolio and believe the current crisis is correctable. The company is taking steps to reduce its debt load by divesting underperforming brands while also seeking to grow its smaller natural brands portfolio. While the natural foods craze is here to stay; I still believe there is space in the market for packaged food companies like Kraft Heinz and General Mills. Finally, I choose to bet on Buffett. Buffett is rarely wrong on long-term holdings and the short-term haircut that he has taken on Kraft Heinz will pay off in the long run. Buffett has not sold his stake meaning that he still sees value in the company. This is encouraging for value investors who believe that the short-term pain of today should pay off in larger gains tomorrow. I would be a buyer of shares in the $27-28 range.