Advisor Roundtable: Your Favorite Labor Day Stock

If any man tells you he loves America, yet hates labor, he is a liar. If any man tells you he trusts America, yet fears labor, he is a fool.

 – Abraham Lincoln

We at KCI Investing salute America’s workers on this Labor Day weekend. As the U.S. Department of Labor writes on its website:

The vital force of labor added materially to the highest standard of living and the greatest production the world has ever known and has brought us closer to the realization of our traditional ideals of economic and political democracy. It is appropriate, therefore, that the nation pay tribute on Labor Day to the creator of so much of the nation’s strength, freedom, and leadership — the American worker.

Too often investors view employees as nothing more than a cost center for a corporation.  Layoffs are cheered because cost cutting promises immediately higher corporate profits. But generating profits on the back of labor is only a short-term fix that usually backfires in the long run. Back in the 1990s, “Chainsaw” Al Dunlap cut labor expenses to the bone at Sunbeam and it worked – for awhile – but the company eventually collapsed under a mountain of debt, products that weren’t selling, and accounting fraud.

Much more recently, investors bid up the stock of Hewlett-Packard (NYSE: HPQ) on former CEO Mark Hurd’s seemingly endless cost-cutting initiatives, but the stock has fallen precipitously since his August ouster on mysterious allegations of sex harassment and fraudulent expense reports. It turns out that HP employees and executives absolutely hated Hurd and jumped at the first excuse to get rid of him. According to a NY Times article, Hurd had a rude and demeaning personality and improved profits almost exclusively by laying off employees and cutting the R&D budget by more than 75%. His modus operandi was:

putting up dazzling short-term numbers that had the effect of enriching himself while robbing HP’s future. Nearly two-thirds of HP employees said they would leave if they got an offer from another company — a staggering number.

HP’s board may have waited too long to get rid of Hurd. I fear for HP’s future given the damage he apparently wrought on employee morale and the corporate culture. In answering the question “which three measurements give the best sense of a company’s health?” former General Electric (NYSE: GE) CEO Jack Welch states on his website:

Employee engagement is first. It goes without saying that no company, small or large, can win over the long run without energized employees who believe in the mission and understand how to achieve it.

A University of Michigan study also emphasizes the importance to the corporate bottom line of a motivated employee workforce. As a Forbes article summarizes:

The study found that as employee motivation improved, the firm’s stock enjoyed higher subsequent returns the following year, spanning times both good and bad. As an example in 2002 the S&P 500 returned negative 22%. Yet the study found that for every five points added onto a firm’s Employee Motivation Index — how the study kept score — it returned an additional 2% in stock price the following year.

Employees are motivated when they “feel communicated with more, respected more and given more control of their work.” In addition, the study found that the higher a company’s score for pay and benefits in one year, the better the return to shareholders in the subsequent one-to-three year period.

With that in mind, I asked KCI’s investment gurus the following question:

What is Your Favorite Labor Day Stock?

Not surprisingly, our friends at KCI had no difficulty coming up with the names of great companies that both treat their employees well and do well on the bottom line. In fact, one leads to the other. A great resource to finding such model corporate citizens is Fortune Magazine’s list of the 100 Best Companies to Work For. Read on to find out which companies are KCI’s favorite Labor Day stocks:

Roger Conrad — Utility Forecaster, Canadian Edge, MLP Profits

Whenever there’s a power outage, I’m reminded of how electric utility line workers are the unsung heroes of the American economy. There’s no more welcome sight than a utility truck in your area when the power is out. Treating utility line workers with respect and fairly financially is just good business for companies. The workforce is aging with more than half age 45 or older, and after years of neglect by America‘s education system, replacements are hard to come by. Thankfully, management/labor conflicts of past years have been rare in recent years.

In my Utility Forecaster investment service, I pay attention to companies that seem to do the best job of keeping their workforce happy. Southern Company (NYSE: SO) is one power company that’s drawn high marks from the increasingly important information technology industry, which is key to its efficiency efforts.

Elliott Gue — Personal Finance, Energy Strategist, MLP Profits, Stocks on the Run

One of my favorite oil and gas exploration and production firms, EOG Resources (NYSE: EOG), made Fortune’s list of Best Places to Work.

Long-term success in the energy production business requires access to top-notch reserves that have low production costs. In the onshore U.S. market, that means acreage in so-called “unconventional” oil and gas fields — these fields contain vast amounts of oil but require the use of horizontal drilling and hydraulic fracturing techniques to be produced efficiently. EOG has a solid position in many of the largest and most exciting fields including the Bakken Shale oil field of North Dakota and the Eagle Ford Shale field located in southern Texas. The Eagle Ford produces crude oil, natural gas and natural gas liquids (NGLs) but EOG is most concentrated in sections of the field that are focused on oil and NGLs rather than gas.

I also like the fact EOG has plenty of flexibility. A few years ago, the company was primarily known as a gas producer but it is now approaching 50 percent liquids and 50 percent gas and management has said that it will focus on oil going forward due to weak natural gas prices. However, it would be relatively easy for EOG to shift some investment dollars back to gas when prices improve as it has acreage in several prolific gas plays in the U.S. and Canada. Management can simply tilt its budget to favor regions that offer the strongest return on investment.

EOG also has years of experience working in unconventional shale fields. The importance of this cannot be overstated — over time, operators have been able to streamline their fracturing and drilling techniques to improve efficiency, shorten drill times and cut costs.

Yiannis Mostrous — Silk Road Investor, Global ETF Profits, Stocks on the Run

It was good to see that Personal Finance growth portfolio favorite Monsanto (NYSE: MON) was included in Fortune’s list of Best Places to Work.

The company is the undisputed leader in the genetically modified (GM) seed industry. Its business consists of two segments: Seeds/Genomics and Agricultural Productivity. The Seeds/Genomics segment consists of the company’s global seeds and traits business and genetic technology platforms, including biotechnology, breeding and genomics. The Agricultural Productivity segment consists primarily of crop protection products, residential lawn-and-garden herbicide products, and the company’s animal agricultural businesses.

The seed business is currently in a sweet spot as global food demand changes dramatically. Rising demand for food is a well-known problem. The world needs to increase production from diminishing arable land. As incomes around the world rise, so does demand for food, boosting the importance of companies such as Monsanto, which will play an integral role in the future of GM food production.

The upshot is industry leader Monsanto is virtually guaranteed greater earnings growth and solid pricing power. This, in turn, means higher cash flows and enhanced financial strength, a condition that gives the company the opportunity to allocate more funds toward research and to strengthen its product pipeline.

David Dittman – Canadian Edge

Labor Day suggests a lot of things, but to me the seminal factor is railroads. The holiday went federal in the aftermath of the 1894 Pullman Strike, during which several railroad workers died during skirmishes with the U.S. military and U.S. marshals. In typical symbolic fashion, Congress rushed through legislation establishing the federal Labor Day holiday six days after the Pullman Strike ended.

A lot has changed during the ensuing 116 years. But rail transport’s status as a vital part of commerce endures. Rail is still more efficient in terms of energy consumption than other means of freight transport, and it’s a relatively cheap way to move bulk commodities such as coal across significant distances. We cover two railroads in our Canadian Edge investment service: Canadian National Railway (NYSE: CNI) and Canadian Pacific Railway (NYSE: CP).

Canadian National has proposed shipping oil sands production south to the U.S. and west to British Columbia’s ports for eventual trans-Pacific delivery to emerging economies such as China. Scaling the “Pipeline on Rails” up to 4 million barrels is simply a matter of adding cars; current rail capacity is sufficient to handle such volumes. Canadian Pacific is enjoying a solid 2010 on the still-acute need for metallurgical coal to produce steel in China and a resurgence of international demand for potash.

For the record, Canadian National’s last labor strike ended Dec. 2, 2009, while Canadian Pacific’s most recent union walkout was settled on June 12, 2007.

Jim Fink – InvestingDaily.com

As an employee myself, my favorite company is Automatic Data Processing (NYSE: ADP) because it issues my paychecks. I like competitor Paychex (NasdaqGS: PAYX) for the same reason and Paychex has the added benefit of being No. 54 on the Fortune’s list of Best Places to Work. ADP primarily services large corporations whereas Paychex focuses more on mid-sized and smaller companies.

Payroll processing and benefits administration are great businesses because they are software-based and don’t require much continual capital investment. This “asset light” business model means lots and lots of free cash flow which can be used to pay dividends. ADP pays 3.5% and Paychex pays 4.9%.

Switching costs are high because of the time and expense it would take a company to install and integrate new software, as well as the complexity and security concerns of transferring employee accounts and information. Consequently, once a company signs up for ADP or Paychex services, they usually agree to be locked into long-term contracts. Furthermore, these clients are more amenable to price increases than they would be if it was easier to switch to a competitor. Similar to insurance companies, payroll processing companies also benefit from earning interest on the “float” of monies received from employers but not yet paid out to employees.

If you like to invest in stable, dividend-paying companies that are virtually debt-free and generate copious amounts of free cash flow, these two companies fit the bill.

KCI Investing has an incredible collection of top-notch investment minds covering all aspects of the stock, bond, international, and ETF marketplaces. Whether you are interested in growth, energy, utility income, Canadian income trusts, emerging markets, ETFs, master limited partnerships, or short-term trading opportunities, KCI has an investment expert and service ready to help guide you towards wealth accumulation and financial independence.