Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long IdeasMarket Wisdom

A Low Cost Growth Portfolio

The great thing about Mr. Market is that he is always providing us with tremendous bargains when we dare look. Even in today’s overhyped and overpriced market there are some tremendous bargains that would drive a great low-cost growth portfolio.

It is my belief that a few of these stocks can be used to create a low-cost growth portfolio that would be ideal for retirement or other long-term buy and hold purposes. These equities were chosen for their stability and durability, as well as their low price. Yet they have strong potential for growth, which is what makes them good buy and hold plays.

Here are a few stocks you should consider if you want to invest long term and you have limited resources:

The Best Bargain on Wall Street

One of my favorites is Ford Motor (NYSE: F) which I regard as the best bargain on the Street right now.

What’s not to love about a company with a 6.5% profit margin and a 2.223 diluted EPS (earnings per share) ratio that was trading at $13.68 a share on July 14, 2016? Nothing, because the earnings report that Ford turned on March 31, 2016, indicates the company is swimming in cash and growing at an astounding rate.

The wonderful numbers Ford reported for March 31, 2016, include:

  • A TTM revenue of $153.38 billion.


  • A net income of $8.901 billion.


  • A free cash flow of $2.581 billion


  • Assets of $237.29 billion.


  • Cash and short-term investments of $67.71 billion (that means Ford has enough money in the bank to buy Uber if it wanted to).


  • $14.07 billion in cash from financing.


  • $17.85 billion in cash from operations.


Ford is also a tremendously undervalued company it had a market capitalization of $53.53 billion and an enterprise value of $124.43 billion on July 12, 2016. Yet its revenue is growing like a weed. Ford added $3.82 billion to its revenues during the first quarter of 2015; and $11.28 billion in revenues during the year between March 2015 and March 2016. For the record; Ford reported revenues of $142.1 billion in March 2015 and $149.56 billion in December 2015.

Beyond that Ford is in a great position to cash in on trends in the auto industry. It has plans to invest $4.5 billion on the development of electric vehicles; and an alliance with Uber for the development of self-driving automobiles.

There are also Ford models with tremendous potential for the future such as the Transit Connect minivan. Sales of Fiat-Chrysler Automobiles’ (NYSE: FCA) Dodge Grand Caravan minivan increased by 76% between May 2015 and May 2016, The Detroit Free-Press reported. Were Ford to bring out an electric or self-driving Transit Connect it would have a license to print money.

Ford stockholders should not complain right now they are currently enjoying a dividend yield of 4.45|% and a return on equity of 32.49% according to ycharts data.

A Great Finance and Technology Play

The only one of the new technology issues I like is PayPal Holdings (NASDAQ: PYPL). Even though the stock is new, PayPal itself is an established company with a loyal customer base, a great reputation and a strong brand. Its’ digital wallet is also a really great product that I’ve used for years.


Other thins I like about PayPal are the low cost; $39.84 a share on July 12, 2016, 14.35% profit margin, 10.8% return on equity, $1.338 billion net income, and $605 million free cash flow. Beyond that I just love PayPal’s ability to accumulate cash.

PayPal reported $14.57 billion in cash and short-term investments, $2.953 billion in cash from financing and $2.74 billion cash from operations on March 31, 2016. That’s an incredible performance from a financial technology company that had its IPO just last year.

The data provided by ycharts indicates some incredible growth at PayPal; including revenues that grew by $1.367 billion in a year, rising from$8.288 billion in March 2015 to $9.655 billion in March 2016. Cash and short-term investments also increased by $12.195 billion in a year; rising from $2.375 billion in March 2015 to $14.57 billion, a year later.

That makes for a lot of float and provides indications that PayPal might become the new American Express (NYSE: AXP). Such expectations are strengthened by the fact that Amex has launched its own small-business lending program to compete with PayPal.

The King of Grocers

Kroger (NYSE: KR) the Cincinnati-based grocery giant has reported an astounding 50 straight quarters of revenue growth. Over the past year alone, Kroger achieved a revenue growth rate of 5%, a net income growth rate of 10% and an EPS growth rate of 13%, according to the Motley Fool’s Demitrios Kalogeropoulos.

That’s a pretty impressive rate of growth when other retail giants like Target (NYSE: TGT) and Walmart are struggling with anemic growth or declining revenues. Kroger reported $111.38 billion in revenues on April 30, 2016; making it one of America’s largest retailers.


Target; in contrast reported $72.86 billion in revenue on the same day. That was the third quarter of declining revenues at Target; the discount icon reported $73.91 billion in revenue in October 2015, $73.78 billion January 2016, and $72.86 billion April.

The revenue figures show us that Kroger is achieving sustainable growth in a declining industry. It is bucking retail trends and delivering an EPS of 2.13, a net income of 2.1 billion, a profit margin of 1.97%, a dividend yield of 1.13%, a free cash flow of $962 million and a return on equity of 33.92%.

There’s also $5.13 billion cash from operations and $391 million in cash and short-term investments. Beyond that I like Kroger’s ability to cash in on retail trends. It sold $1 billion worth of its Simple Truth natural and organic brand alone. There’s also plenty of room for profitable mergers and acquisitions in the grocery sector, last year Kroger bought Roundy’s; a Wisconsin grocer with $4.03 billion in revenue for just $800 million.

The Bargain in Banks

When shares of a company with a net income of $15.47 billion are trading at $13.70 a piece I have took. The company is Bank of America (NYSE: BAC); a Buffett-favorite that reported revenues of $81.65 billion on March 31, 2016.

This monster bank is not for the faint of heart; it reported $1.923 trillion in liabilities on March 31, 2016. To make matters worse; its revenues fell by $1.4 billion during the first quarter of 2016. For the record; BOA reported revenues of $83.05 billion in December 2015 that fell to $81.65 billion in March. That indicates there are serious problems with its consumer banking business.


Despite that it’s a good basic stock, reporting some interesting numbers including: $15.47 billion in net income, a profit margin of 13.74%, a dividend yield of 1.48%, a free cash flow of $10.84 billion and a return on equity of 6.65%. Bank of America also has a lot of cash it reported $185.5 billion in cash and short-term investments, $39.46 billion in cash from financing and $38.33 billion in cash from operations on March 31, 2016.

BOA is a good investment because it has enough float to sustain its operations for a long time. It also has an incredible amount of resources including $2.185 trillion in assets and an enterprise value of $238.26 billion on July 12, 2016. Yet ycharts reported it had a market capitalization of $139.39 billion on the same day.

If that is not a bargain, I do not know what is. Even if the revenue collapse continues, Bank of America investors will continue making money for a long time to come.

A Note on Methodology

My methodology here is simple; I picked four undervalued stocks that are making money right now, but have a lot of growth potential. More importantly you will not lose any money on these stocks.

Please remember that these picks are simply recommendations based on my research and intuition. Always do your own resource, and remember that anybody can be wrong.

Disclosure: your friendly neighborhood blogger owns shares of Bank of America, and he has owned shares of PayPal and Kroger in the recent past. He also plans to buy shares of the four companies mentioned in the near future.