PALO ALTO, Calif. (CNN/Money) -
Just the other day I warned against picking stocks that already have worked well for others. Fads make money for the other guy; If you buy too late you run the risk of being the greater fool.
Having said that, there are companies that are so good that their stocks always perform well -- evened out over a very long time. It's these stocks the long-term investor wants to consider owning: boring, conservative companies that just deliver year after year. This week I'll discuss three such stocks.
My favorite example is always Illinois Tool Works (ITW: down $0.83 to $67.47, Research, Estimates), which I've heard called "the ultimate nuts and bolts company." ITW is so stodgy it hasn't even gotten around to changing its old-fashioned name. Wait, strike that. The professionals who run ITW probably didn't want to spend the money to change the name. Run from a famously Spartan headquarters in the Chicago suburbs, Illinois Tool Works is a conglomeration of unpopular businesses like plastic packaging machines, auto components, and, yes, fasteners -- nuts and bolts to you and me.
How successful is Illinois Tool Works, whose founders and still minority shareholders are the same family that started Chicago's Northern Trust money-management firm? Compare ITW to any index over any reasonable period of time, say, a year or greater. You'd be hard-pressed to find as durable a company in the $20-billion market value range.
What makes ITW so good is that although it buys companies like crazy, it's the anti-Tyco in that it doesn't frequently enter whole new product areas. It's also the anti-AOL Time Warner (my employer) in that "synergy" is a dirty word around ITW. The company brags about its decentralization. Its own boilerplate description says it all: "ITW is a $9.3 billion diversified manufacturer of highly engineered components and industrial systems. The company consists of approximately 600 decentralized operations in 43 countries and employs 52,000 people."
What this means is that with a few exceptions (like its 1999 purchase of food-industry product company Premark International), ITW lets its individual businesses do the buying. Between 1994 and 2001 ITW completed 222 acquisitions. It eschews the turnaround. And it makes sure each purchase will add to earnings.
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RECENTLY BY ADAM LASHINSKY
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What the company doesn't do much of is toot its own horn. But if you go to its Web site you'll see ITW's goals printed plain as day. For the last five years of the last decade it averaged revenue growth of 9.3 percent, operating income growth of 15 percent and earnings per share growth of 14 percent. Because it aims to spend $800 million per year on acquisitions, continually improve margins and grow existing business a modest 3 to 4 percent per year, the company reckons the next five years will look a lot like the last five.
Because ITW is so well managed, its stock pretty much always seems fully valued. The shares trade at about 25 times trailing earnings -- a good deal better than the company's earnings growth rate. And the annual dividend (remember what that is?) of 88 cents works out to an unexciting yield of 1.3 percent.
This is no go-go stock. But ITW has been making money for its founding family since 1912, and it's highly unlikely to lose money for the public investor who holds on for a goodly amount of time.
Old economy, baby!
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at adam_lashinsky@timeinc.com.
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