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The Safest Stocks in the World

By Dan Ferris, editor, Extreme Value
Thursday, September 23, 2010

The safest stocks in the world right now have three important traits.
The first trait of a safe stock is a rock-solid financial condition. The best financial condition possible is when a company has plenty of cash and little or no debt.
Think about your own financial condition. Would you rather have $1 million in cash and no debt or $1 million in debt and no cash? It's a silly question. Everybody would love to have $1 million in cash and no debt. It's the same with a business.
The best example is Microsoft. No matter what anyone says about it, I'm 100% certain Microsoft is one of the safest stocks in the world today.
Microsoft is in the best possible financial condition. It has $36.8 billion in cash, stocks, and bonds and less than $6 billion in debt. It could completely eliminate its debt and still have more than $30 billion left over. If you paid all your debts and had $30 billion left over, you'd feel pretty secure.
Microsoft shareholders feel that way every day. No matter what happens in the world, there's never a financial crisis at Microsoft.
Here's a list of more safe, blue-chip stocks that are all in a strong financial condition...
(in billions)
(in billions)
Microsoft (MSFT)
Johnson & Johnson (JNJ)
Intel (INTC)
Costco (COST)
Automatic Data Processing (ADP)
TJX Companies (TJX)
A strong financial condition is just the beginning. The other two traits of safe stocks are just as important...
The second trait of a safe stock is that it generates more cash than it reinvests to keep the businesses going.
Again, think of yourself... Would you like to run out of money two days before you get your paycheck? Or would you like to have $5,000 more than you spend each month? That $5,000 is excess cash flow. You'd feel more secure with plenty of excess cash flow each month.
It's the same with businesses. Businesses that generate excess cash flow every year are safer than those that don't. Johnson & Johnson earned more than $15 billion of excess cash flow in the past 12 months. Automatic Data Processing earns about $1.5 billion in excess cash flow per year. In fact, all six stocks listed above generate large amounts of excess cash flow every year.
The third trait of a safe stock is that it's obviously worth more than its stock price. I'm not talking about a company worth $50 a share that sells for $48. That's too close to call. I'm talking about companies worth at least 50% more than their stock price.
Intel at $18 a share is a great example. Right now, the stock market says Intel's business is worth about eight times the excess cash flow it can generate in one year. That's an absurdly low price. Over the past few years, we've seen great businesses sell for several times that: Gillette, Wrigley's, and Anheuser-Busch were all bought out for 28-32 times one year's excess cash flow.
Intel is too big to be bought out. But even if it were only worth half what Gillette, Wrigley's, or Anheuser-Busch were worth... that's 75%-100% upside from here. With a great financial condition, excess cash flow, and a low stock price, Intel is one of the safest stocks in the world today.
To recap, the safest stocks in the world...
  • Have a rock-solid financial condition, usually with more cash than debt.
  • Generate more cash than needed to keep the business going.
  • Are worth at least 50% more than their current stock price.
Many investors think they must take big risks to make big money in stocks. It's just the opposite. You have to eliminate the risk of loss as much as possible.
Invest only in the safest stocks, and you'll retire rich. And if you wanted to, you could probably retire years ahead of schedule.
Good investing,
Dan Ferris

Further Reading:

For ultimate safety of principal... and a big income stream, Tom Dyson likes bonds issued by "by rock-solid companies that have no possibility of going broke." Bonds can be the better investment for two reasons: "First, they're safer. Second, bonds pay higher income rates than stocks." Get the full story here: How to Make a Safe 7% Interest in a 0% Interest World.
"Beating the stock market every year is easy," Tom writes. You simply have to find the kinds of companies Dan describes, buy the ones that consistently raise their dividends, and then "faithfully reinvest those dividends." Learn more here: This Tiny Group of Stocks Beat the Market Every Year Since 1972.

Market Notes


Today, we offer up one more "China confounds the skeptics" chart – one near and dear to our hearts. The chart displays the past five years of trading in one of China's largest airline companies, China Southern Airlines (ZNH).
The Chinese stock market is one of our favorite markets to trade. Since China is the world's greatest growth story, it attracts an enormous amount of speculative trading capital. This makes stocks there boom and bust like crazy. You can ride 'em up, and you can ride 'em down.
In mid-2007, China stocks were in the middle of a historic boom. When this boom turned to bust, we picked on China Southern as a stock that would get crushed. The stock went on to fall from $35 per share to just $6 per share as our prediction came true.
But as we've recently noted, high-profile "China plays" are surging right now... including our old friend China Southern. The stock is up 62% this year and sits at a 52-week high. We're sure this big boom will end brutally – just as the one in 2007 did. But for now, it's "game on" in Chinese stocks.

China Southern: One of the great

In The Daily Crux

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