3 Stock Picks for Your IRA

Christine Benz: Hi, I'm Christine Benz from Morningstar. It's IRA season and many investors are on the hunt for worthy holdings for their portfolios. Joining me to share some individual stock ideas for investors is Jeff Stafford. He's Morningstar's director of equity research in North America. Jeff, thank you so much for being here.

Jeff Stafford: Thanks for having me, Christine.

Benz: Jeff, when we think about good holdings for IRAs, sometimes we think about holdings that might kick off a lot of current income and so you want to tax-shelter that income, assuming that you're reinvesting those dividends. So a couple of the ideas that you brought do have fairly decent yields attached to them. Let's start with the first one: That's Schlumberger, and it looks like one of the things that you and the team think makes it attractive is that you think it's inexpensive currently. So let's talk about its undervaluation.

Stafford: So Schlumberger is a company, oil field services company, that really helps oil and gas exploration and production companies take hydrocarbons out of the ground. They provide the products and services that help those companies. So the capital expenditures of the oil and gas companies--those are really the revenues in many cases for Schlumberger. And that's where our thesis for the company comes into play. So we think that the market is really underestimating international oil and gas capital expenditure growth over the next five years or so.

Benz: And what would be the catalyst for that, do you think?

Stafford: So, that's mainly just the oil demand that we expect to be out there is going to need to be replaced by sources of supply, and a lot of that is expected to come from U.S. shale, which is the marginal producer. But there's also these more, call them, traditional sources of oil and gas outside of the U.S. that are going to need more investment to help close that gap with demand even after we see growth in U.S. shale.

Benz: So the yield is pretty attractive on Schlumberger and you think that it's a solid dividend. It's likely to stay reasonably high.

Stafford: Yeah. We feel pretty good about the security of the dividend based on the cash flows that we're forecasting for the company.

Benz: So the ticker for Schlumberger is SLB. Another one you like is Kellogg; ticker is K. This one, too, is trading at a decent discount to the analyst's estimate of fair value. Let's talk about why you think it'll kind of climb out of the slump that it's been in.

Stafford: Yeah, so I think that's kind of a two-prong story around revenue growth and on the margin side, too, on operating margin. So we're beginning to see some signs that revenue growth is tracking in a way that we would expect based on some of the strategic initiatives that the company has put in place. So things like minimizing the product line to divest some noncore parts of the business. They're changing the way that they do their distribution, and that's had a positive impact on growth. And I think the market is appreciating that somewhat, but it's still kind of hung up on the margin story for Kellogg. And we see the margin pressure that's on the company right now related to some long-term investments that we expect will pay off in the future. Investments in things like the brand, which should help Kellogg maintain its wide moat and keep competition at bay.

Benz: And you think some acquisitions that they've made have kind of gotten them on the right side of the trend toward healthy eating? It seems like everybody's low-carb and anti-cereal right now.

Stafford: So investors might not realize that Kellogg owns a lot of other brands outside of Kellogg cereal, and some of the movement that they've made in their portfolio has helped them kind of stay more on-trend with some of the things that we're seeing in snacking.

Benz: So this one has a decent yield attached to it, not quite as high as a Schlumberger. Do you feel like that's a solid yield as well?

Stafford: Yeah, we do. I mean, when you look at the other options out there for kind of yield- and income-focused investors, we think that the Kellogg dividend is something that should be attractive for those types of investors.

Benz: So another one that doesn't have such an attractive yield but nonetheless looks attractive in terms of being undervalued is Expedia. This is kind of a household name if you're doing some travel search. So this company has not performed especially well, but you and the analyst team think that it's pretty inexpensive today. Let's talk about that.

Stafford: Yeah, so I think one of the main concerns in the market right now with Expedia is competition that people are thinking could come from the likes of Google and even Amazon. But we would point to Expedia's narrow moat. And that is based on a network effect that we think is very strong. So it creates a virtuous circle. So you have properties added to Expedia and that attracts more users to the platform and more users to the platform attracts more properties and so on and so forth. So we think that that network effect that Expedia has built over years will prove to be a formidable thing for them to help them keep competition at bay.

Benz: So if I had to plot these three stocks on sort of a risk spectrum, would you think of this as being the most risky of the three that we've talked about?

Stafford: Yeah, it's got a higher uncertainty rating. So that's something that we look at, too. I'd say Schlumberger would be up there in terms of risk and uncertainty as well. And maybe a little bit lower on the uncertainty side would be Kellogg.

Benz: Jeff, always great to get your insights. Thank you so much for being here.

Stafford: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz from Morningstar.