The 10 Highest Potential Returns in Construction and Farm Machinery Stocks
In a speech to the Financial Planning Association, legendary Vanguard founder and former CEO John Bogle made an observation that's absolutely critical to understanding where the best stock returns come from -- and how to find the next great stock to buy.
He told the assembled guests that only three things drive investor returns:
- Earnings growth
- Changes in valuation
That's all it comes down to. Historically, stocks have returned 9.6% per year on average -- 5%, 4.5%, and 0.1% from dividends, earnings growth, and valuation changes, respectively. Naturally, the best stocks to buy are the ones that will produce the highest combined return.
So which construction and farm machinery stocks will earn investors the best returns today? Obviously, no one can say with total certainty. Estimates about the future should always be taken with a grain of salt, particularly when analyst forecasts are involved. In fact, studies show that analysts' long-term earnings per share estimates tend to be off by some 40%, so I've reduced their estimates accordingly.
But by running the numbers, we can compile a list of which stocks are the implied best buys today. Here are our assumptions:
Dividend Yield (current)
5-Year Growth Rate
Assumed Price-to-Earnings Ratio
|China Yuchai (NYS: CYD)||3.4%||7%||16|
|Caterpillar (NYS: CAT)||2.4%||14%||23|
|Cummins (NYS: CMI)||1.8%||13%||21|
|Oshkosh (NYS: OSK)||0.0%||4%||12|
|CNH Global (NYS: CNH)||0.0%||10%||19|
|Deere (NYS: DE)||2.5%||9%||18|
|Joy Global (NAS: JOYG)||1.0%||9%||18|
Source: Standard & Poor's' Capital IQ. Includes stocks on major U.S. exchanges capitalized over $200 million with positive earnings and at least one analyst long-term earnings estimate.
And here are their implied five-year annualized returns for shareholders. I've ordered the three return components by their reliability -- first dividends, then earnings growth, then valuation.
Earnings Growth Return
Implied Cumulative Annual Return
Source: Author's calculations. *Assumes dividend growth at rate of earnings growth.
The raw numbers tell us that these are the 10 most promising names in construction and farm machinery. Of course, analysts' growth assumptions for any individual company could prove overly optimistic or pessimistic, as could their future valuations, so the implied cumulative returns are hypothetical. For example, China Yuchai is trading at a low valuation in large part because investors are incredibly skeptical of Chinese small caps. That said, this list helps you focus on this sector's highest potential returners -- and provides an excellent starting point of names for further research.
At the time this article was published Foolish contributorIlan Moscovitzdoes not own shares in any companies mentioned here. You can follow him on Twitter@TMFDada. The Motley Fool owns shares of Joy Global and Oshkosh.Motley Fool newsletter serviceshave recommended buying shares of Cummins and Toro. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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