So far, 2010 has been a volatile year for stocks.
We started off the year with a 7% decline through the beginning of February. This was followed by 16% rise through the end of April. Stocks then embarked on a correction that wiped out the gains for the year. This was followed by 7% bounce in less than two weeks, which ended at the beginning of second-quarter earnings season.
It seems like every day investors or forced to navigate conflicting economic reports. One day the economy is recovering nicely. The next, the consumer is rolling over, and we are headed for a double-dip recession.
Even company reports can be confusing. A company beat EPS estimates, but issues soft guidance. Or, a company earns record profit margins, but its revenue growth is slowing.
If these conditions persist, investors need to be prepared for more volatile price action. Future winning streaks will last several days to several weeks, leaving most investors feeling comfortable. Those rallies, however, will be followed by gut-wrenching sell-offs that leave many investors wondering if it makes sense to even own stocks.
This type of price action will continue to wear down many investors, especially those who aren’t interested in trading stocks on a daily or weekly basis. Investors that fall into that group should take a step back and look for stocks that have the potential to appreciate as conditions improve, but also provide decent current income that beats owning a 10-year treasury bond.
Stocks that meet these two criteria are usually called growth and income (G&I) stocks. Owning these stocks should allow individual investors to take a longer-term view on their holdings and better withstand the day-to-day price swings in the stock market.
Growth and Income Stocks
Most investors can meet their long-term objectives by targeting growth and income stocks. That’s because G&I stocks are typically larger companies with stable business models that are leaders in their respective markets. These companies have steady revenues and earnings, are positioned to deliver solid long-term earnings growth, and produce enviable returns on equity. Those attributes allow a company to generate consistent cash flow and pay out a share of its profit in the form of dividends.
Here are four stocks that meet those growth and income factors. Specifically, each stock has a Zacks #2 Rank, a dividend yield of at least 2%, a return on equity (ROE) of 10% or higher, and expected long-term EPS growth of no less than 10%.
3M Co. (MMM) is a diversified technology company worldwide. It operates in six segments: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications.
The company had first-quarter EPS of $1.40, topping the Zacks Consensus Estimate by 19 cents, or 15.7%. In the last four quarters, 3M has beaten consensus estimates by an average of 17.0%.
In the last month, the Zacks Consensus Estimate for 2010 is up 4 cents, while the Zacks Consensus Estimate for 2011 is down a penny. 3M is scheduled to report second-quarter results on July 22.
MMM is a Zacks #2 Rank stock. Its shares trade at 14.4x 2010 consensus EPS estimates.
Caterpillar (CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines worldwide.
For the first quarter, Caterpillar earned $0.50 per share, an increase of 28.2% compared to the year-ago quarter. Its Q1 EPS also beat the Zacks Consensus by 11 cents or 28.2%. We note that the company has beaten the Zacks Consensus in the last five quarters by an average 400%.
In the last month, the Zacks Consensus Estimate for 2010 has increased 12 cents, or 3.8%, to $3.28, and the Zacks Consensus Estimate for 2011 has climbed 7 cents, or 1.5%, to $4.73. Caterpillar is scheduled to report Q2 results on July 22.
CAT is a Zacks #2 Rank stock. It trades at 19.7x 2010 consensus EPS estimates.
W.W. Grainger Inc. (GWW) and its subsidiaries distribute facilities maintenance and other related products and services in the U.S., Canada, Japan and Mexico.
On July 15, the company reported second-quarter results of $1.65, beating the Zacks Consensus Estimate by 15 cents, or 10.0%. GWW has beaten the Zacks Consensus in four out of the last five quarters (it met estimates in the other) by an average of 8.4%.
In the last week, the Zacks Consensus Estimate for 2010 is up 14 cents, or 2.3%, to $6.23. The Zacks Consensus Estimate for 2011 is also up 14 cents, or 2.0%, to $7.18.
W.W. Grainger has a Zacks #2 Rank, and its shares trade at 16.8x 2010 consensus EPS estimates.
United Parcel Service (UPS) is a package delivery company. The company provides transportation, logistics and financial services in the U.S. and internationally.
UPS had first-quarter EPS of $0.71, beating the Zacks Consensus Estimate of $0.69. In the last three quarters, the company has beaten consensus estimates by an average of 3.8%.
Consensus estimates for 2010 and 2011 have been flat for the last two months. UPS is scheduled to report second-quarter earnings on July 22.
UPS is a Zacks #2 Rank stock, and it trades at 18.3x 2010 consensus EPS estimates.
| Ticker | Zacks Rank | Dividend Yield | ROE | P/E | YTD Return |
| MMM | #2 | 2.6% | 11.4% | 14.4x | -2.1% |
| CAT | #2 | 2.8% | 16.8% | 19.7x | 12.2% |
| GWW | #2 | 2.1% | 19.4% | 16.8x | 8.4% |
| UPS | #2 | 3.2% | 34.4% | 18.3x | 4.0% |
