Markets don't go up forever. The 12% advance in the S&P 500 during the first quarter made it seem like that was the case, but reality is kicking in so far in the second quarter. What's certain about the stock market is that the future is uncertain.
What to Look For
Despite what's happening with stocks, the U.S. economy in 2012 is heading in the right direction. Investors now need to focus on not overpaying simply so to be invested in the stock market. Future growth of a business dictates what one should pay today for a business. It's often more prudent to pay more for a growing business than to pay less for zero growth. The margin of safety is often in the future earnings power of a company.
A lot of growth is coming from abroad and that's the case with DIRECTV (Nasdaq:DTV), the leading satellite cable provider. In many parts of the world, like Latin America, satellite cable is necessary as opposed to traditional cable towers. DIRECTV is also leading the way in terms of providing specific content like the NFL channel geared at attracting loyal sports fans. Shares trade for $50 and less than 10 times next year's earnings estimate.
Low Risk Growth
Looking ahead, investors should strive to keep things as simple as possible. The question to ask is what works in this environment? Businesses like CVS Caremark (NYSE:CVS) and Walgreens (NYSE:WAG) provide and answer to this question. The U.S. population is getting older and these two chains have become the new neighborhood drugstores. Most Americans live closer to a CVS or Walgreens than they do Wal-Mart (NYSE:WMT), and the prices are just as competitive. Considering Wal-Mart is a juggernaut with over $400 billion in annual sales and CVS and Walgreen each generate less than 25% of that, growth becomes much easier working off a smaller base. Over the next few years, they should do well and so ultimately should the share price.
The Bottom Line
Most investing mistakes happen when investors try to over-complicate things. A business creates value by growing profits and cash flows. Growth is not an easy thing to accomplish consistently, which is why many investors can't generate quality consistent investment returns. Sticking to a simple philosophy can go a long way in today's market environment.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.