When everything is going down, the best mindset to have is a long term one. Longstanding stocks such as Stella-Jones Inc has fared well over time in a volatile stock market, which is why it’s my top pick to invest in. Below I take a look at three key characteristics of what makes a strong defensive stock investment: its size, financial health and track record.
Stella-Jones Inc. produces, markets, and sells pressure treated wood products in Canada and the United States. Stella-Jones was started in 1992 and with the stock’s market cap sitting at CA$3.11b, it comes under the mid-cap stocks category. Generally, large-cap stocks are well-resourced and well-established meaning that a bear market will cause it to rejig some short-term capital allocations, but stock market volatility is hardly detrimental to its financial health and business operations. Therefore large-cap stocks are a safe bet to buy more of when the wider market is going down and down.
With CA$581.2m debt on its books, Stella-Jones has to pay interest periodically. This means it needs to have enough cash on hand to meet these upcoming expenses. With an interest coverage ratio of 11.13x, Stella-Jones produces sufficient earnings (EBIT) to cover its interest payments. Anything above 3x is considered safe practice. Moreover, its cash flows from operations copiously covers it debt by 34.0%, which is higher than the bare minimum requirement of 20%. Its cash and short-term investment is also sufficient to cover other upcoming liabilities, which means SJ is financially robust in the face of a volatile market.
SJ’s annual earnings growth rate has been positive over the last five years, with an average rate of 15.7%, beating the market growth rate of 11.7%. It has also returned an ROE of 13.5% recently, above the market return of 10.4%. This consistent market outperformance illustrates a robust track record of delivering strong returns over a number of years, increasing my conviction in Stella-Jones as an investment over the long run.
Next Steps:Whether you’re convinced or not, the key takeaway here is that every stock gets hit in a bear market, but not every stock deserves the blow. When prices are dropping like flies, now is the time to do your research and buy at a discount. Stella-Jones tick the boxes in terms of its scale, financial health and proven track record, but there are a few other things I have yet to consider. Below I’ve compiled a list of factors for you to continue your reading before you buy:
- Future Outlook: What are well-informed industry analysts predicting for SJ’s future growth? Take a look at our free research report of analyst consensus for SJ’s outlook.
- Valuation: What is SJ worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SJ is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.