3 boring but beautiful stocks I bought in Q3
Hope you enjoy the roller coaster, because that’s about what 2020 has been like for the stock market. Many records have been broken, including the sharpest bear market drop of at least 30%, the fastest rebound to new highs in history, and the highest reading for the CBOE Volatility Index.
But as seasoned investors will tell you, times of heightened volatility have historically been a good time to shop. This is because every bear market drop or stock market correction in history has finally been erased by a bull market rally.
Knowing that the major US stock indexes tend to rise in value over time, I made a few purchases in the third quarter. A nibbler by nature, I love being able to buy new stocks or add to existing holdings as often as I want without accruing any commission fees (my online brokerage is one of many that have gone commission-free) .
I wasn’t looking for high growth tech stocks in the third quarter. On the contrary, the three companies I bought or added are what I would classify as boring but beautiful companies. These companies often pay a dividend, are generally profitable, have proven operating models, and don’t get me sleepy.
Without further ado, here are the three boring but beautiful companies I bought in the third quarter.
Alliance of Walgreens boots
Generally, health stocks do very well during recessions. Health is a concern, whether the economy is doing poorly or well, demand therefore remains constant. But that was not the case for Walgreens, which was hit by lower foot traffic due to the 2019 coronavirus disease (COVID-19) pandemic.
However, a long-term recovery plan was put in place and the valuation was far too tempting to be left out.
Arguably the biggest change we’re going to see with Walgreens Boots Alliance is the company’s focus on become a one-stop health destination. The company is partnering with VillageMD to install up to 700 colocated full-service medical practices in its stores, combining primary care and pharmacy solutions. This model keeps customers within its ecosystem of products and services and (more importantly) gives Walgreens an edge with chronic disease patients.
Another key attribute in Walgreens’ turnaround history is the investments in digitization. The plan is to have more products available for mobile order pickup, as well as to extend direct offerings to the company’s rapidly growing consumers.
In the end, Walgreens’ forward P / E of 7 and 5.3% dividend yield proved too attractive. Remember, Walgreens is a dividend aristocrat with a 44-year streak of increasing earnings.
I bought two of the three companies on this list during the September stock market blackout, but opened a new position at a storage solutions company. Western digital (NASDAQ: WDC) during his swan dive in mid-August.
Western Digital, which develops and manufactures various hard drives (HDDs) and SSDs, has struggled for over a year with industry oversupply, price pressure and recent demand concerns related to COVID- 19. The company itself suspended its dividend in order to save nearly $ 600 million per year, which will give it more financial flexibility to repay its net debt of approximately $ 6.9 billion.
But despite the company saying goodbye to its dividend, I see a lot to like over the next five years.
In the shorter term, the game console cycle should prove fruitful for Western Digital. Video game consoles tend to last for years, so new introductions can be rare. However, we are on the rise when it comes to consoles, with Sonyon PS5 and MicrosoftXbox Series S and Xbox Series X will be released in November. Sophisticated new consoles will require more robust storage solutions, which should give Western Digital a boost for at least a year or two.
What really turns me on about this generally boring and highly cyclical business is the fact that it has some connection to cloud computing. Western Digital does not create the software that powers the cloud, but it is responsible for the growing needs for data solutions in enterprise data centers. The coronavirus pandemic has demonstrated how important it is for businesses to have an online and / or cloud presence. This means an ever increasing demand for enterprise data centers and data storage.
For now, Western Digital hard drives are the backbone of enterprise data centers. But by the mid-decade, the company’s NAND flash memory drives could become the essential solution for enterprise data centers.
The last boring but beautiful stock I bought in Q3 is from the telecom giant AT&T (NYSE: T). Unlike Walgreens and Western Digital, AT&T was already a stake in my portfolio, so this purchase only added to my existing stake.
While the reference S&P 500 has regained everything that was lost in the first quarter erasure, AT&T’s share price has fallen nearly 27% since mid-February and is nearing its lowest level in nine years. Much of the skepticism surrounding AT&T comes down to the continued decline in subscribers for subsidiary DIRECTV, as well as its monstrous debt load following the acquisition of Time Warner in 2018.
I readily admit that AT&T is no longer the growth stock it once was. But it is also a big source of money that has more catalysts in its sails than you might think.
For example, AT&T has spent a lot of money deploying 5G wireless infrastructure nationwide. This rollout won’t happen overnight, but we’re talking about the first major upgrade to wireless download speeds in a decade. Consumers and businesses will jump at the chance to take advantage of faster download speeds, especially with data usage on the rise. I expect that we will see a multi-year increase in organic growth from AT & T’s higher margin wireless division.
I’m also encouraged by the launch of the HBO Max streaming service at the end of May. In its first month after launch, HBO Max had around 4.1 million subscribers. This means that HBO and HBO Max combined had 36.3 million subscribers at the end of June. The AT&T management team estimates that this figure can reach 80 million by 2025.
Finally, management has taken steps to address the debt by selling non-core assets, temporarily suspending share buybacks and considering the sale of DIRECTV. From the company foolproof dividend, which currently earns 7.35%, remains intact. At that return, you can double your money by reinvesting in less than a decade.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.