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David Butler

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Three accomplished investors pick great investments for a three-stock portfolio.

The great thing about living in the United States is that we have virtually unlimited choices. (Proof: Have you ever checked out the potato chip aisle?) The same holds true for the cornucopia of stocks you can invest in. You can purchase more than 3,300 stocks on The Nasdaq exchange, while there are an additional 2,800 up-for-grabs on the New York Stock Exchange.

With so many choices, it’s hard for investors to choose which stocks are the best to invest in. We asked three successful investors and Motley Fool contributors what they’d choose if they ONLY could select three. The answers may surprise you.

Barbara Eisner Bayer: Diversification is a key component of any successful portfolio. It reduces risk but gives you the opportunity to beat the market with a few big winners. It’s hard to incorporate diversity into a portfolio of just three stocks, but I’m going to try. The most important factor to me is that they’re all excellent businesses with strong management. But in order to diversify, I’m going to choose companies that have very little to do with each other.

My first choice will be the heart and soul of my three holdings — and that’s Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) led by the incorrigible and brilliant Warren Buffett, who recently turned 90. Owning BRK is like owning the greatest mutual fund out there — except it has arguably the best manager ever at its helm and no management fee. The company is less like a stock and more like a holding company for some incredible businesses, including GEICO, Dairy Queen, Fruit of the Loom, and Duracell. And since Buffett knows he can’t live forever, he’s empowered his lieutenants Todd Combs and Ted Weschler to purchase stocks in their own style, which has led to recent purchases of Apple, Amazon (NASDAQ:AMZN), and most recently, the IPO Snowflake. That’s in addition to its bank holdings like Wells Fargo and Bank of New York Mellon, and such stalwart companies as Coca Cola, Kraft Heinz, and General Motors.

By owning Berkshire, I’m free to include a more risky, high-growth stock in my three holdings, and my choice is Docusign (NASDAQ:DOCU). Anyone who has needed to sign an important document during the coronavirus pandemic is no doubt familiar with the company, which enables people to deliver their John Hancocks online and close deals no matter where they are in the world. As of Sept. 1, shares were up 190% in 2020 after surging almost 85% in 2019. And last year, the company created the “Docusign Agreement Cloud,” which enables any business to automate an entire agreement life cycle. The stock may be a bit pricey now, but I believe it will grow into its valuation over the long term.

For my last choice, I want a company that’s going to keep giving me free money. So I’m going to choose a dividend stock. But instead of looking at Dividend Aristrocrats, I’m going to select a real estate investment trust (REIT) in a growing industry — marijuana — and choose Innovative Industrial Properties (NYSE:IIPR). The company buys the land under a legal cannabis grower and then leases it back to the seller. Since the company is a REIT, it must return 90% of its taxable income to shareholders — hence, the healthy dividend, which most recently was around 3.2%. IIRP nicely rounds out my three-stock portfolio and will guarantee that no matter what happens to my other two holdings, I’ll always be receiving income.

IMAGE SOURCE: GETTY IMAGES.

Eric Volkman: For my trio, I’d want two that are still relatively young companies with enormous potential still in front of them. As to the third, I’d be aiming for a steady business that spits out a regular, nicely yielding dividend.

In the former category is Square (NYSE:SQ). Since none of us are going out much these days, it’s easy to forget that the company’s distinctive payment registers and terminals are becoming ever more prevalent. These point-of-sale devices, meanwhile, are hooked onto an ever-mushrooming ecosystem of complimentary goods and services, giving the company enormous scope for expansion.

Stock No. 2 is Facebook (NASDAQ:FB). Despite persistent controversy over numerous issues and constantly rising competition for eyeballs, it’s still far and away the social media company on the planet. It’s hard to beat its powerful one-two punch of advanced ad targeting and enormity of user base, which makes it a must-spend for a great many advertisers.

I don’t see anyone topping Facebook in that combination of factors, so I fully expect the company to stay dominant and growing for years.

Finally, my pick for the “Steady Eddie” of the bunch is Digital Realty Trust (NYSE:DLR). This veteran real estate investment trust (REIT) is one of a handful that specializes in data centers — vital facilities for the digital age. The company operates data centers around the world.

More are coming. A recent estimate has it that roughly 65% of all corporate-server computers are still located at their company’s facilities. So the number of potential new clients is immense. With its presence and its experience, Digital Realty Trust feels like the data center REIT best positioned to take advantage of this. And its yield, while not the highest in its niche, is still quite substantial at 3.2%.

IMAGE SOURCE: GETTY IMAGES.

David Butler: If I could only own three stocks, I’d have a portfolio based on growth countered by a value pick.

First and foremost, I’d focus on American companies. There’s no need to flirt with foreign equities in a three-stock portfolio, and the U.S. economy is still the best to do business in. The stocks themselves would come down to three attributes: broad economic potential, and a combination of growth and value. Nothing crazy, as the lack of diversification means you can’t take as much risk on anything.

It’s a truism, and it’s borderline boring, but the cards are simply stacked in Amazon’s favor right now. In a three-stock portfolio, I’d take it. The e-commerce company has such a demonstrated control of the retail market, and social distancing has only enhanced the company’s positioning. Structurally, there just doesn’t seem to be anything at present that will stop the story of what Amazon has been doing to the retail sector.

Second would be a financial play. Banking is one of the few sectors that isn’t commanding huge premiums and offers deals for those who can buy and wait. Low interest rates or not, this is an important piece of any portfolio. My choice would be JPMorgan (NYSE:JPM). Prior to 2020, the bank had excellent returns on equity, and Jamie Dimon has done an incredible job keeping the bank at the head of the pack. The 3.9% dividend doesn’t hurt either.

The final has to be Berkshire Hathaway. The conglomerate carries the vast insurance assets built by Warren Buffett and has nearly $150 billion in cash on hand to invest at its leisure. That capital and quality of assets make it a compelling play that will be able to get in on any game it wants — even after Mr. Buffett’s time at the helm expires. By owning shares, you’ll get in on those plays, too. This is a valuable counter lever to the more speculative pricing that one pays to invest in Amazon.

Author: Barbara Eisner Bayer, Eric Volkman, And David Butler

Source: Fool: We Ask Successful Investors: If You Could Only Own 3 Stocks, What Would They Be?

The camera giant has been awarded a huge government loan aimed at reducing U.S. reliance on foreign pharmaceutical supply.

Eastman Kodak (NYSE:KODK), the beleaguered film company that was forced into bankruptcy as digital cameras took over the world, has found a new business entirely. The stock skyrocketed today on news that it was awarded a government loan for $765 million under the Defense Production Act to help the company begin producing generic drug ingredients.

It’s a surprising turn for what was primarily a photography-based business. The deal is a play on improving America’s ability to rely on domestic production of pharmaceutical products amid the coronavirus pandemic. Kodak’s facilities in Rochester and St. Paul, Minnesota are the focal points of the new pharmaceutical side of the business which will be called Kodak Pharmaceutical. Kodak said it will focus on making essential ingredients that the Food and Drug Administration has identified as there being a national shortage of.

IMAGE SOURCE: GETTY IMAGES

Some analysts are questioning the move, wondering why the deal wouldn’t have been given to a company already involved in the pharmaceutical industry. President Trump may have held a preference for a producer outside of the current drug regime. Political tensions have increased this week, as pharma executives and analysts react to Trump’s recent executive orders that aimed to lower drug prices.

Whatever the reasoning, it’s a fascinating chance for Kodak to make a new start, and investors have reacted bullishly. So far this week, the stock is up around 1,150%. The company came out of bankruptcy in 2013 and has struggled to grow over the last five years. Moving into a field like drug sales could provide a good avenue for the photography pioneer.

Author: David Butler

Source: Fool: Kodak Stock Up More Than 1,000% On Deal To Produce Generic Drug Ingredients

Good value investors find stocks that trade for a discount relative to their intrinsic value. These three do just that.

Growth stocks have most definitely had their time to shine over the past decade of this market expansion, but there has been a place for good, old-fashioned value stocks as well. Value picks are made for the long haul. With lower valuations, value stocks can help limit the downside potential.

Many value stocks outperform the broader market over the long term. To that end, finding good value stocks with long term growth potential can be very lucrative to the patient investor. Three names that I like are General Dynamics (NYSE:GD), United Rentals Inc. (NYSE:URI), and the coveted Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).

1. General Dynamics: Defense contractors never go out of style

General Dynamics has made its name by being a supplier of choice to one of the most consistent customers in the world — the U.S. military. Over the long haul, this stock has beaten the S&P 500 by a handsome margin. Since 1977, an investment in General Dynamics has gained 2,263% compared to the S&P 500’s 1,183% gain over the same time frame. The defense contractor’s specialty is making machines, including tanks, submarines, and communications equipment. The company also builds Gulfstream jets.

For the just-completed fourth quarter, General Dynamics reported an earnings beat, bringing in a diluted EPS of $3.51 and net earnings that improved by 12.2% year over year to $1 billion on $10.8 billion in overall revenue. For the full year, diluted EPS was up 6.8%. The company’s revenues over the long term have produced consistent growth.

While United States military spending does deviate through time and international conflicts, demand for defense contractors seems very unlikely to diminish over the long term. A name like General Dynamics is going to continue to be a part of that story. The company’s track record of beating the market is demonstrative of the strength.

2. United Rentals: The world’s largest equipment renter

United Rentals Inc. is a giant renter of industrial/construction equipment and tools. Revenue has grown sequentially at double-digit rates over the past three years. Earnings growth has been a bit up and down more recently, which accounts for the stock’s stagnation since 2018, not to mention the general market downturn at the tail end of that year.

Since its IPO in 1997, the stock has outpaced the S&P 500 by a wide margin. United Rentals shares have gained 866% in that time frame, whereas the S&P 500 has gained 248%.

Fiscal 2019 earnings of $15.11 per diluted share give United Rentals a trailing P/E ratio of 9.9 times earnings, making it a pretty cheap play. The recent fourth quarter included revenue growth of 6.5% and $4.49 per diluted share versus last year’s earnings of $3.80 per diluted share. Weaker gross margins of 39.9% dampened enthusiasm for the earnings release.

Going into 2020, the company is forecasting total revenues of $9.4 billion to $9.8 billion. On the liberal end of that guidance, it would mark around 4.8% growth from 2019’s $9.35 billion. That’s a slower rate of growth than the few previous years, but the low valuation of the stock, coupled with the historic performance, make it an appealing play. Overall, this company has done well long-term. Currently trading at about 10 times 2019 full-year earnings, this is a cheap stock to get in on.

3. Berkshire Hathaway: The tried and true

Buying Berkshire Hathaway is essentially investing in the best value fund of all time. The investment conglomerate is focused on value stocks and offers exposure to a large array of enterprises.

Since 1996, Berkshire Hathaway shares have crushed the S&P 500; growing 786% relative to the S&P’s 279%. Some might criticize the company’s ill-timed 2015 investment in Kraft Heinz, and CEO Warren Buffett’s bow out from newspapers just this year, but that’s not where the investment magic resides for Berkshire Hathaway. The insurance businesses it operates are what make the company a real value for investors. The cash flow from premiums gives the company a lot of ammo to play with on other investments.

Estimates for full-year 2019 earnings are calling for $10.41 per share (in terms of BRK.B shares). If that’s accurate, shares are trading at 21.7 times full-year earnings. That’s a pretty cheap premium for a company that plays the game better than anyone.

Factor in the fact that the company held $128 billion in cash reserves at the end of the third quarter, and this is a super appealing play. That kind of capital gives the investment conglomerate a lot of ammo to take advantage of the next economic downturn. While we haven’t seen a recession in a long time, eventually it will happen. When it does, Berkshire Hathaway has extreme amounts of capital to put to use investing in future winners. Warren Buffett used large capital reserves in the 2008 downturn to gain large positions in names like Goldman Sachs, Dow Chemical and Bank of America.

Author: David Butler

Source: Fool: 3 Top Value Stocks to Buy Right Now

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