3 Shareholder-Friendly Companies to Navigate Market Volatility - 7investing 7investing
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3 Shareholder-Friendly Companies to Navigate Market Volatility

Looking for a hedge against market volatility? 7investing CEO Simon Erickson explains why Tractor Supply, CME Group, and Ubiquiti Inc could be calmer waters within the storm.

February 6, 2023

The stock market’s volatility of the past year has sent several investors fleeing for safety. And it’s hard to blame them.

2022 marked one of the worst years in the stock market’s history. The S&P500’s (18%) overall drop was the fourth-worst return of the past half-century. Only 2008 (which was a 38% loss), 2002 (a 22% loss) and 1974 (down 26%) were worse, in terms of overall performance.

Yet perhaps there’s a light emerging at the end of the tunnel? January’s 11% gain for the tech-heavy Nasdaq marked the best January since 2001.

While no one knows for sure what 2023 holds in store, there’s still a way to invest and also sleep well at night. Regardless of whether value stocks or growth stocks are in vogue this year, less-volatile and shareholder-friendly companies are often a good option for those who embrace long-term investing but don’t enjoy the gut-wrenching volatility.

So for your investing consideration, I’d like to present three “Goldilocks” stock ideas. Tractor Supply (Nasdaq: TSCO), CME Group (Nasdaq: CME), and Ubiquiti, Inc (NYSE: UI) each have growth drivers that could provide long-term upside, while also are somewhat immune to the cyclical risks of inflation or rising interest rates.

If you’re a fan of the porridge that tastes just right, these three stock ideas might be a good fit for you.

The “Out Here” Lifestyle

Tractor Supply is a retailer who serves customers on the outskirts of town. They sell the necessities for those in rural areas, such as lawn maintenance equipment, ranching supplies, and chicken coops.

While they ironically don’t sell tractors, several of their items are consumable in nature. This encourages customers to visit their stores on a weekly or bi-weekly basis, and to often load up on other items they didn’t even know they needed. The company’s “Neighbor’s Club” loyalty program now has 28 million members and its retail locations are present in every state except Alaska.

Deer corn and chicken feed might sound commoditized. Yet because several of these items are heavy and low-margin, e-commerce platforms like Amazon (Nasdaq: AMZN) have no interest in paying for the logistics to ship them from their distribution warehouses. This makes Tractor Supply one of the few bricks-and-mortar retailers who is insulated from the e-commerce onslaught.

Same-store-sales increased 8.6% in year-over-year comparisons, driven by a 6.3% increase in ticket size, while gross margin inched up to 34%. Tractor Supply is an extremely shareholder-friendly company, increasing its dividend by 77% last year as its Board of Directors has shown a commitment to returning excess profits to investors through cash payouts.

an image of a tractor loading hay in a field

Creating Value from Volatility

There’s no shortage of boat-rocking volatility in the market. From global pandemics to skyrocketing interest rates to international conflicts, it feels like we’re continually navigating through turbulent waters.

CME Group is one of the few companies who benefits from this market volatility. As the owner and operator of the world’s largest derivatives and options exchanges, it provides traders a way to lock-in future prices for everything from eggs to Bitcoin. Professional investors who wants to methodically manage risk trade contracts on CME’s platform every day. Broader volatility is a boon to the trading business, as it drives speculation and contract volumes.

CME reported an average daily volume (ADV) of 21.7 million contracts in January. Its greatest contributor to start this year was interest rates contracts, which reached 10.3 million ADV during the month. The specific contracts that follow the Secured Overnight Financing Rate (SOFR) increased 500% over last year!

With a broad and vastly-diversified product line, CME has something for everyone in any market condition. Its Board recently increased its quarterly dividend by 10% to $1.10 per share. Coupled with its recent $4.50 special dividend, CME’s stock is now paying out $8.90 annually. Based on its recent stock price of $175, the shares yield 5%.

an image of a magnifying glass hovering over volatile stock prices

Time to Buy Back Shares

Last year, Earth’s population officially reached 8 billion people. Yet more than a third of them don’t yet have reliable internet access.

Ubiquiti is looking to change that, designing and selling the low-cost networking equipment needed for devices to access Wi-Fi ubiquitously. It sells routers and backhaul equipment to telecom providers like Comcast, wireless access points and switching gear to enterprises, and home networking systems to consumers. By not employing a direct sales force and relentlessly investing in R&D, it captures higher margins than competitors like Cisco (Nasdaq: CSCO).

There’s also an interesting and often overlooked part of the investing thesis in Ubiquiti. The company’s CEO and founder Robert Pera owns more than 90% of its outstanding shares and has continually authorized a share repurchase program.

That means any time Ubiquiti’s stock price drops, the company simply buys back shares at a lower price point. This provides an incredibly safe floor for investors, limiting its downside risk even after short-sellers’ attacks or supply chain disruptions.

Ubiquiti used all $300 million of its previous repurchase plan to buy back more than one million shares in 2022. It has now authorized another $200 million buyback for 2023.

Pera accepts zero compensation, paying himself (and also us as shareholders) only through a rising cash dividend. In a world fraught with excessive stock-based compensation and options awards, a founder/CEO who compensates himself in a way that’s directly aligned with our interests as shareholders is certainly refreshing. Ubiquiti’s $0.60 quarterly dividend has doubled in three years and now yields 0.8%.

an artistic image of wi-fi internet

The 7investing Key Takeaway

Not all stocks are negatively-exposed to the market’s volatility. Companies who exhibit steady fundamental growth can afford to reward their shareholders through buybacks and dividends.

Tractor Supply, CME Group, and Ubiquiti are three companies who have methodically developed shareholder-return plans. They can be excellent options for investors looking for stability during the market’s recent rollercoaster.

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