If you're just getting started investing in stocks, it may seem intimidating. After all, you're putting your money at risk and have absolutely no guarantee that you will get a positive return on that money. An important part of getting past that concern is to recognize what a share of stock really is: It's a small ownership stake in a company. As a shareholder, over long periods of time, your returns should depend on how well the company performs, as long as you're able to buy your shares at a reasonable value.
The more straightforward it is to understand the underlying business, the easier it is to get a handle on how it makes money. The easier that is, the better your chances are of recognizing what a reasonable value is when you're investing. With that train of thought in mind, here are three stocks for beginning investors to consider as they begin what may become a lifelong journey of stock ownership.
1. An energy infrastructure giant
Kinder Morgan (NYSE: KMI) is in the business of moving energy around. It owns or operates around 70,000 miles worth of natural gas pipelines, as well as around 9,500 miles of pipelines for petroleum products. Even as greener fuels become a key part of our energy mix, oil and natural gas are projected to be in demand for decades to come. That makes it clear that there will still be a need to transport that energy around.
In addition, pipelines tend to be a more economical way of transporting oil and natural gas around than trucks or trains are. That makes it likely that companies like Kinder Morgan will remain in demand as long as oil and natural gas are being used. It also means that they're likely to have fairly stable revenues, as producers will likely cut back on more expensive transportation methods when times are tight.
That predictability makes for a company that's fairly easy to understand and evaluate, but also one that's not exactly poised for exceptionally fast growth. That could be OK, though, since the company's market capitalization of around $37.5 billion is only around eight times its operating cash flows of nearly $4.6 billion.
2. A well-known titan in the food industry
JM Smucker (NYSE: SJM) may best be known for its eponymous fruit spreads, jams, and jellies, but its food empire stretches well beyond that, into realms like coffee, peanut butter, and pet foods. Although the staple-type foods it's known for aren't the fastest growing markets around, they do tend to be fairly recession resistant. That makes it easier to estimate cash flows than it would be for a company that is more exposed to the ups and downs of the economy.
Analysts aren't expecting much, if any, growth from JM Smucker over the next few years. Still, the company is trading at around 15 times earnings and offers investors around a 2.7% yield. That combination provides better potential income than buying long-term Treasury bonds, while still having the opportunity to participate in any growth that the company may see.
In addition, JM Smucker's debt load is not too heavy given the size of the business. It owes about $5 billion in debt while generating around $1.9 billion in earnings before interest, taxes, depreciation, and amortization. That indicates that the company's total debt level represents less than three years' worth of its cash flows. At levels like that, it is likely that it will be able to cover its debt service costs even if its business struggles for a somewhat extended period.
JM Smucker is a well-known company in an essential industry, trading for a reasonable price for a slow-growth business with a fairly healthy balance sheet. That makes it reasonable for new investors to consider.
3. A chance to beat most professional money managers
There's a fairly straightforward investing strategy that tends to beat the vast majority of funds led by professional money managers, year after year. Best of all, it's a simple enough strategy that even first time investors can succeed with it. The strategy? Buy an index fund. Seriously, that's it. Over long periods of time, simply buying an index-based exchange traded fund like SPDR S&P 500 ETF (NYSEMKT: SPY) gets you invested in a way that tends to beat professional fund managers.
The SPDR S&P 500 ETF attempts to track the S&P 500 index — an index of 500 of the largest U.S.-based companies. It does so while only carrying a 0.09% expense ratio, which means that investors have good reason to believe their performance will be really close to the index. They get that performance by buying only one security — the ETF itself — while the ETF's managers are responsible for making sure their holdings mirror the index.
Technically, the SPDR S&P 500 ETF is a collection of 500 stocks rather than a single stock, but it trades in the market as a single security like typical stocks do. In addition to the decent chance of beating Wall Street's best and brightest, you get a decent measure of instant diversification. That's a great benefit, because if one of the companies in the index fails, as an external investor, you'll likely hardly notice it.
Contrast that to what happens if you own a single stock and the company behind it fails — you'll likely wind up losing your entire investment in that company. That's what sets this ETF apart from investing in any individual company and why it's worth the consideration of even beginning investors.
Investing doesn't have to be complicated
Whether you're looking to dip your toes into stocks by finding and buying straightforward companies at reasonable prices, or by buying an entire index all at once, investing doesn't have to be complicated. The key to remember is that a share of stock is nothing more than a small ownership stake in a company. Start with that framework and treat every investment as though you were buying a company for its cash generating ability, and you'll likely soon find yourself a much more comfortable investor.
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Chuck Saletta owns shares of J.M. Smucker and Kinder Morgan and has the following options: long January 2022 $20.0 calls on Kinder Morgan, long July 2021 $115.0 calls on J.M. Smucker, short January 2022 $20.0 puts on Kinder Morgan, short July 2021 $115.0 puts on J.M. Smucker, short July 2021 $135.0 calls on J.M. Smucker, short June 2021 $18.0 puts on Kinder Morgan, and short June 2021 $20.0 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.