Graduating from college is an enormous step. We enter the world as educated adults, setting out to begin our careers and follow our dreams. While the future is bright, and the road long, it's never too early to start plan for retirement. Indeed, thanks to the power of compound growth, the earlier you begin, the better off you'll be.
With this indisputable fact in mind, we asked some of the Motley Fool's best and brightest to come up with some great stocks for recent grads to consider. They suggested 8Point3 Energy Partners (CAFD), Nike (NKE -1.11%), and CareTrust REIT (CTRE 1.89%). Read on for all the key details.
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Generating value from the Sun
Sean O'Reilly (8Point3 Energy Partners): 8Point3 Energy Partners is a limited partnership formed by First Solar Inc. and SunPower Corp. The company acquires and operates solar energy generation projects with the aim of generating predictable cash flows that grow at a sustainable rate. Not only is that business model sustainable, it makes plenty of money for investors. 8Point3 Energy Partners' solar portfolio consisted of 945 megawatts of U.S generating assets as of the end of the Q1 2017 During the quarter, it also completed the acquisition of First Solar's 34% stake in the 300 MW Stateline project.
The company's stock price has languished over the past 12 months, down some 10%. However, it has started to regain some momentum in recent weeks, especially on talk that it could be an attractive acquisition target for NextEra Energy Partners. And its high-quality solar portfolio also continues support a bull case. The 3% increase it made in its quarterly distribution to $0.2565 a share last quarter also affirms that 8Point3 Energy Partners remains a strong buy for investors looking to generate some value. With a current dividend yield of 7.5%, supported by more than 20 years of contracted utility distribution deals, 8point3 Energy Partners is a fantastic buy for recent college graduates looking to invest in a sustainable business at a low price.
Hit the ground running (in Nike shoes)
Steve Symington (Nike): Most recent college graduates are at the beginning of their working lives, and will enjoy the advantage of being able to invest with time horizons measured in decades, during which power of compounding will be able do its work. I think Nike stock is a perfect fit for that circumstance.
Despite its enormous size, the athletic footwear and sportswear juggernaut regularly reminds investors of its ambition to remain a growth company for the foreseeable future. And Nike sustained that growth last quarter, when revenue climbed 5% year over year (7% in constant currency) despite industry headwinds in North America. The modest 3% revenue growth in its home market was offset by double-digit percentage growth in Western Europe, Greater China, and its emerging markets segment.
And while several leading sporting goods retailers have filed for bankruptcy over the past year, Nike is finding success with its higher-margin, direct-to-consumer (DTC) business. DTC sales climbed 13% last quarter thanks to a combination of 18% e-commerce growth, new Nike stores, and a strong 6% increase in comparable-store sales.
Nike uses its healthy cash flow and solid profitability to return capital to shareholders. The company repurchased 8.9 million shares for around $475 million last quarter alone under the four-year, $12 billion stock repurchase program it approved in late 2015. Nike also pays a quarterly dividend that yields around 1.4% annually as of this writing.
Perhaps best of all for those looking to invest today, shares are down around 9% over the past three months. Investors reacted negatively in March to what CEO Mark Parker described as a "more promotional environment in the near term" in North America. For recent college grades willing to take advantage of that pullback, I think Nike is poised to beat the market in the coming years.
Don't judge a book by its cover
Jason Hall (CareTrust REIT): At first blush, shares of rehab and senior housing property owner CareTrust REIT seem a bit pricey, trading at more than 33 times last year's earnings. While such a valuation may seem exorbitant, even for a company like CareTrust, with fantastic long-term growth prospects as the population of older Americans in need of its offerings is set to grow by the millions every year for the next couple of decades.
The thing is, as a REIT -- or real estate investment trust -- CareTrust should not be evaluated by the same standards as a normal company. Due to accounting rules, those simply isn't the best metrics for assessing one's profitability. All REITs are required under Generally Accepted Accounting Practices (GAAP) to depreciate their real estate holdings, even though real estate almost always appreciates in value over the long term. This dichotomy between accounting conventions and economic facts obscures a portion of a REIT's real earnings.
It is for this reason that the FFO (funds from operations) result is a better measure of a REIT's earnings, since it starts with net income, then adds the depreciation expense back in. If we value CareTrust REIT based on its price-to-FFO ratio, we get a much more reasonable multiple of 16.4, roughly half its P/E.
And with fewer than 160 properties in its portfolio, 16.4 times FFO is a steal of a price for a company that could easily grow to multiple times its current size within a decade. For all of these reasons and more, CareTrust is an ideal value stock to buy right out of college and hold for decades.
