It makes me laugh when I hear folks talk about stocks they want to buy.
They rant about some cloud company or some artificial intelligence company that's going to change technology as we know it. Or they talk about some drug that's going to make billions for a tiny biotech company (and they usually can't even pronounce the drug's name correctly.)
To impress friends and other investors, most of us love spewing off complex-sounding ideas. The more intricate the idea is, the more likely that people can't understand what you're talking about, which makes for a solid investment... or at least that's the thought.
In reality, successful investing isn't that complicated.
You don't need the "next big thing."
If you remember my November 2019 essay, "Doc's Formula for Buying Winning Stocks," there are really only five things you need in an investment...
- Consistent top-line growth
- Does more with less (companies that don't have to spend a lot of money to make a lot of money)
- Increases dividends every year
- Avoids too much debt
- Trades for a reasonable price
That's it. This is the simple investing formula my team and I use to find stock recommendations for our paid-up subscribers.
There are times when we want to buy something that doesn't meet all five of our requirements... but for the most part, this is how we've been able to make our readers money over the years.
I'll give you an example...
A couple of months ago, I recommended buying shares of home-improvement giant Home Depot (HD) in my Income Intelligence newsletter.
Home Depot checks a lot of the boxes we look for...
- Revenue has grown higher every year since 2010
- Home Depot has a return on assets of 19.9%, which puts it in the top 6% of all S&P 500 companies
- Annual dividend payments have increased from $0.94 in 2010 to $6 this year
- Has a solid balance sheet with a net debt-to-EBITDA ratio of just 1.6
- And thanks to the coronavirus, we got to buy Home Depot when its valuation was near a seven-year low
The best part, I didn't need a hot tip from anyone to find Home Depot...
All I had to do was drive by a few of its locations and I could see that its parking lots were packed – even at the height of the COVID-19 crisis.
Folks haven't been venturing out of their homes for much... but when they do, it's often to Home Depot. Being cooped up in the house has led a lot of homeowners to finally fix their leaky sink or redo their bathroom.
Two of my analysts recently bought new homes and they told me they practically live at Home Depot on weekends. Buying Home Depot was a no-brainer... Especially after I dug into its financial statements.
My subscribers are already up 30% on Home Depot in just under two months. And I believe there are much more gains to come...
Home Depot has everything I look for in an investment and will likely turn out to be a long-term capital compounder.
Sometimes investing should be simple. In fact, it ought to be... at least if you want to make consistent returns.
In tonight's issue of Retirement Millionaire, I start by talking about a health care stock that has gone up by 200% in the past year.
It's one of those buzzword stocks that everyone and their mother seems to be buying today. But the company burns through a lot of cash and likely won't be profitable for the next couple years. It's going to face a lot of challenges.
There's also another company I talk about that does exactly what the buzzword company does – but only better. And this company brings in $11.7 billion of free cash flow, earns a return of 11.6% on shareholder's equity, and pays a healthy dividend near 3%.
Also, the buzzword stock trades for 20 times sales... while the stock we're recommending that our subscribers buy trades for 0.35 times sales.
Now, without knowing either of the companies, you tell me which stock will make shareholders more money in the next two to five years.
If you want to be successful in investing, it's a good idea to stay away from hot stocks, companies you don't understand, and ones that don't have a shot at becoming profitable.
Stick with my formula and you'll own some of the greatest companies in the world. That's how you grow your wealth. And that's the type of company I'm recommending tonight.
And if you're not already a Retirement Millionaire subscriber, you can click here to learn about a discounted membership.
What We're Reading...
- The U.S. Economy is too fragile for Congress to remove income support.
- Something different: Should you send your kids back to school? Here's what the experts say.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
June 10, 2020