Institutional investors are still buying earnings safety and predictability in an otherwise slow-growth environment.
In any market, good businesses stand out both in terms of operational growth at a faster rate than the general economy and good share price performance. The Sherwin-Williams Company (SHW) and Alliance Data Systems Incorporated (ADS) are two examples of the kinds of companies institutional investors favor.
The Sherwin-Williams Company (NYSE/SHW)
Institutional investors still have plenty of cash to allocate to the right stocks. One of them is The Sherwin-Williams Company—a mature enterprise that continues to be a tremendous wealth creator. The Sherwin-Williams Company is, of course, the well-known paint and coating manufacturer based out of Cleveland, Ohio. (See “Sherwin-Williams: A Booming Business in a Slow-Growth Market.”)
The company’s latest earnings actually missed Wall Street estimates. However, institutional investors rallied the position due to its solid outlook for the future.
Total sales in the first quarter of 2015 improved 3.5% to $2.45 billion. Sales were negatively impacted by 3.1% due to unfavorable currency translation. The company’s earnings improved solidly to $131 million, up from $115 million in the same quarter last year.
What got institutional investors more interested in the stock (it currently trades close to $300.00 a share) was management’s forecast of a six to eight percent increase in comparable second-quarter sales.
Diluted earnings per share are expected to improve substantially to between $3.70 and $3.90, up from $2.94 in the second quarter of 2014.
Sherwin-Williams’ full-year outlook is similarly as rosy for such a mature, well-branded business.
This stock has been on fire since the beginning of 2012 and should continue to do well. At close to $300.00 a share, this is definitely a stock that could benefit from a share split.
Alliance Data Systems Corporation (NYSE/ADS)
Another highly priced stock with strong participation among institutional investors is Alliance Data Systems Corporation.
Also trading around $300.00 a share, this Plano, Texas-based company operates card loyalty programs like the well-known “AIR MILES” brand.
This is a very good business to be in. The company’s financial growth over the last several years has been tremendous, with growth expectations for the future remaining strong.
For 2015, first-quarter sales grew 30% comparatively to $1.6 billion. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 28% to $474 million, while diluted earnings per share improved 12% to $2.32 in the most recent quarter. According to the company, despite currency translation issues, its first-quarter organic sales growth (excluding acquisitions) grew by 19%. Alliance Data Systems increased its diluted earnings per share guidance for the year to just below 20% over 2014.
This stock is another favorite among institutional investors but is not overly liquid.
Top Stocks for New Money?
Often, great stocks aren’t headline turners. They can be boring, old economy businesses or esoteric technology companies that aren’t well known. But special situations, if they can be called that, can be great additions to quality investment portfolios. Institutional investors know these businesses because they screen for them regularly.
There have been quite a number of good earnings reports so far this season. I continue to like the market’s existing winners for new money. Sherwin-Williams and Alliance Data Systems are just two examples of the kinds of companies investors may want to add to their watch list.