Being able to retire rich, or at least comfortable, is the goal of almost any investor. However, that's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50 and 59 said that they had, on average, about $29,000 saved up. With pensions pretty much gone, and Social Security targeted for cuts in the future, it's hard to count on anyone but yourself. But $29,000 isn't going to cut it for most people, so you have to get involved in the stock market to grow that nest egg. Getting in the game is the easy part; choosing the right stocks is the hard part.
Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:
Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
Dividends: Most retirees need a combination of both growth and income, as they'll be depending more and more on their portfolios to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proved to outperform non-paying dividend companies over long periods of time.
Growth: Investors love dividends, but we all want to see our stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
Low volatility: Retirees want to invest in great growth stocks just as much as anyone else does, but they also want to be able to rest well knowing that their portfolio won't be taking them on a roller-coaster ride. Most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the gyrations of the market.
Although some companies are definitely more geared toward retirees, which companies you choose to invest in will be dictated largely by what you already have in your portfolio. Small, mid-, and large caps can all play a role in your investing strategy, so I've chosen to evaluate all varieties of stocks in this regular series.
So how does Sirius XM Radio stack up?
To check out the valuation of Sirius XM Radio (NAS: SIRI) , we don't want to look at only its P/E ratio of 43.2. That may seem expensive, but really we don't know without looking at the ratio in historical context. Over the past five years, Sirius XM's average P/E ratio has been 138.6, which is more than the current ratio. This suggests that investors may be paying less than they've had to in the past, so it's important to find out why the price tag might be a bit lower today.
Sirius XM doesn't pay a dividend right now. Although the company has been generating free cash flow as of late, I don't see a dividend in the near future, so if you're looking for income, this probably isn't the right stock for you.
Next, we want to ensure that Sirius XM's stock has the ability to climb over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to ensure future earnings growth. Over the past two years, Sirius XM has grown its EBITDA by 61.4% annually, which has helped push the company from a net loss to a profit. Being able to grow its earnings over the past two years is pretty significant, considering all of the recent market turmoil. Of course, this doesn't mean that growth will continue, but it's a great sign that the company can prosper in the face of difficulty.
One of the best gauges of volatility is called beta, which measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that Sirius XM will move in tandem with the market, a beta of 2.0 means that the stock will move up twice as much as the market, and so on. In this case, Sirius XM Radio has a beta of 1.98, which is quite high and forces investors to decide whether they're willing to take on that added volatility.
Let's look at the competition
We've taken a look at Sirius XM Radio, and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it is to understand that particular company. Here are Sirius XM's stats compared with three of its closest competitors.
5-Year Net Income CAGR
Sirius XM Radio
Cumulus Media (NAS: CMLS)
CBS (NYS: CBS)
Westwood One (NAS: WWON)
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Sirius, Cumulus, and CBS went from net losses five years ago to net profits currently; Westwood went from a net profit five years ago to a net loss.
Each company has traits to like and traits that leave something to be desired. Either way, it's beneficial to look at the industry picture and not just Sirius XM in isolation.
Of course, I can't decide for you whether this is the best stock for retirement, but it has passed two of our four tests, which shows that this stock has some promise. Depending on which traits are most important for you, you'd be wise to look further into this stock for your portfolio.
Interested in adding any of the companies above to your watchlist? Get the latest commentary and analysis:
At the time thisarticle was published Jordan DiPietroowns no shares of the companies mentioned here. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.