Long-Term Picks From Our Conservative Holdings

Here are six long-term buys from our Conservative portfolio.

Conservative holdings are less likely to fluctuate violently than Aggressive picks but have a greater tendency for obsolescence. Although fine as short-to-medium-term investments, they can lose their market position over long periods, or their technology can become outdated.

When picking the best Conservative stocks to hold long term, we look for good growth prospects so that we can be confident these businesses will increase their market share and geographical coverage. Using that criteria, these six Conservative Portfolio holdings offer the best long-term investment potential:

DBS Group (OTC: DBSDY) is the leading bank in Singapore, a country whose high standards of probity, tough bank regulation and independence from U.S. and Chinese interference has become Asia’s leading financial center, especially for wealth management. In fact, Singapore is becoming the strongest global center for private banking and wealth management.

DBS advertises itself on its website as “Asia’s safest, Asia’s best,” and was rated the safest bank in Asia by Global Finance every year from 2009 to 2014. The bank has total assets of $332 billion.

In 2014 DBS obtained 62% of its income from Singapore, 30% from Greater China (including Hong Kong) and 8% from Southeast Asia outside Singapore. The bank has 200,000 institutional customers, 6 million consumer banking and wealth management customers and 21,000 employees.

DBS Group’s capital was 15.3% of total assets, well above most Western banks. In the first half of 2015, revenues were up 16% and net income 15% compared to the previous year. The bank has expenses of 44% of revenues and a net return on equity of a solid 12%. Its dividend yield is 3.8% and the current P/E ratio is 9.6 times historic earnings and 8.5 times 4-Traders projection of 2016 earnings; the shares currently trade just above book value.

As a former international banker, I think DBS Group is in the global sweet spot of banking.

Guggenheim China Small-cap ETF (NYSE: HAO) is the best way to play China’s rapid growth, by focusing on the most dynamic sector of the country’s economy as China opens up its capital markets to foreign investors.

The Shanghai stock market is currently around half its all-time high, reached in 2007. It’s 4.5 times its level of 20 years ago, while Chinese GDP in 2014 was 10.2 times its level in 1995 as measured in yuan or 14.5 times its 1995 level in dollars.  While the U.S. stock market is up more than twice as much as nominal GDP during the past 20 years, the Chinese stock market rose between 55% and 65% less than nominal GDP.

Then there’s the question of Shanghai versus Hong Kong prices for the same shares. HAO invests primarily in Hong Kong-listed shares because it follows the Alpha Shares China Small Cap Index, which includes only shares that can be invested in from outside China. However, Hong Kong prices for Chinese shares are far below Shanghai prices, and the two markets are slowly converging as the Chinese government removes its restrictions on domestic investors.

The average P/E ratio in the Shanghai market is 15.1 times, well below Standard and Poor’s 500-stock index of 19.6 times. HAO’s average P/E ratio is much lower, only about 9 times earnings.

Based on China’s growth prospects and the Hong Kong and Shanghai price arbitrage that favors this fund, HAO’s risk-reward outlook is well biased toward reward.

Hon Hai Precision Industries (ADRs OTC: HNHPF) is a Taiwan-based contract manufacturer that goes by the trade name of Foxconn, which among other things makes most of Apple products. Hon Hai’s skill set may have the greater value than Apple’s in the long term, because however important services are, our modern economy cannot exist without manufactured goods.

The Apple–Hon Hai relationship has been successful for Apple (whose operating margins are 28%) but less so for Hon Hai (whose margins are 3.4%). But it’s Hon Hai’s operating margins that are trending upwards.

Hon Hai’s largest manufacturing presence is in China, where it has 12 factories in nine Chinese cities, employing around 500,000 people. In addition, it has factories in Japan, Australia, India, Malaysia, South Korea and Pakistan, as well as Europe, Brazil, Mexico and Indianapolis, U.S.A. Overall, Hon Hai manufactures around 40% of consumer electronics products sold worldwide.

The company had $133 billion in 2014 sales, $78 billion in assets, $45 billion in market capitalization and $4.1 billion in net income. Hon Hai also has $23 billion in cash on hand, and its net income for the first half of 2015 climbed 41% over the previous year to $1.7 billion. With a dividend yield of 4.4%, the stock currently trades on a historic P/E of 10 times and a prospective P/E of 9.3 times based on 4-Traders’ forecast of 2016 earnings.

Hon Hai is a central participant in the tech revolution that is changing our lives. For that reason alone, we should own it.

Industrias Bachoco S.A.B. de C.V. (NYSE: IBA) is a poultry producer based in Celaya, Mexico, with 20% of its sales in the United States in 2014 and the remainder in Mexico (93% of sales in 2014 were chickens and 7% eggs). The company owns and manages more than 1,000 farms with 25,000 employees. Sales in 2014 totaled $2.8 billion, and net income was $266 million, up 95% over the previous year when measured in pesos. Bachoco’s cost advantage rose as a result of the 23% decline of the Mexican peso against the dollar in the past year.

Bachoco’s second-quarter sales were up 12% from the previous year in pesos and 11% in volume, while its operating margin increased from 14.4% to 15.9%. Net income in the first half of 2015 rose 52%. The company currently trades at 10.6 times trailing fourth-quarter earnings, and 13.2 times 4-Traders’ forecast of 2016 earnings (which appears conservative). The stock offers a yield of around 1.9%, and the company has more than $500 million of cash on its balance sheet.

Poultry production is an unglamorous business, but Bachoco has important cost advantages and a strong wind at its back thanks to the peso’s devaluation.

iShares MSCI Philippines ETF (NYSE: EPHE) tracks the performance of the MSCI Philippines Investible Market Index, and with a P/E ratio of 18, it does not seem overvalued. EPHE provides a modest dividend yield of 0.9% and has an expense ratio of 0.62%, which is satisfactory given that some of its holdings aren’t liquid. Assets under management total $267 million, and the top 10 holdings cover a broad spectrum of the Philippine economy, although they don’t include the two Philippine companies in our Aggressive Portfolio.

The Pacific Basin offers the best growth potential in the world. Within the Pacific Basin, the Philippines has the best combination of good growth and a consistent balance of payments surplus, which makes the country invulnerable to a credit crunch.

Under President Benigno Aquino, the Philippines economic growth averaged a stellar 6.5% per year between 2010 and 2014, and the Economist team of forecasters predicts 6.4% growth in 2015 and 6.3% in 2016. With the population growth rate having slowed to 1.8%, the country’s strong economic growth is producing real improvement in living standards so that if current trends continue the Philippines will enjoy a favorable “demographic transition” enjoyed by other fast-growth middle-income economies. The country’s gross external debt is only $58 billion, less than 20% of GDP, while the Economist expects the Philippines budget deficit in 2015 to be a modest 1.9% of GDP.

Yaskawa Electric Corp. (OTC: YASKY) is the world’s leading manufacturer of industrial robots. Global sales of robots increased 27% to 225,000 in 2014, according to the International Federation of Robotics (IFR). Asia is by far the dominant region for industrial robots, accounting for 62% of global industrial robot volume. That means Yaskawa is central to one of the 21st century’s key emerging technologies and to the world’s manufacturing growth.

The industrial robotics market offers more immediate potential for than that for household robots, because ease of use is less important and costs can be much higher. The typical industrial robot sells for between $100,000 and $200,000, including software and associated equipment. The IFR estimated the total market for industrial robots and associated equipment as $25 billion in 2011; the Japanese government predicts that market will reach $70 billion by 2025.

Yaskawa’s principal business traditionally was motion-control systems, a subsector of automation, but robotics now form an increasing percentage of the company’s sales and earnings, currently providing 37% of sales in the latest quarter.

As well as motion control and robotics, Yaskawa also offers systems engineering products and services, accounting for about 20% of sales in 2014.

As the company steps up its presence in the medical robotics market over the next decade, Yaskawa intends to double sales and operating income while increasing the dividend payout rate to 30% from its current 23%; the stock currently yields 1.9%. Sales for the first quarter of the year to March 2016 were up 11% and net income increased 29% as Yaskawa benefited from the weak yen.

Yaskawa trades at 13 times earnings and 12.2 times 4-Traders’ estimates in the year to March 2017. The company represents an excellent stake in our undoubtedly robotic future.

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