5 Top Stocks to Buy This Month

We're kicking off the new month with some fresh stock picks, explaining how you can invest in pharmaceuticals, and diving into one of Warren Buffett's favorite metrics ------------------------------------------------------------------------------------------------------------------------------------------------------ [View this email in your browser]( How did we get to August so quickly? It feels like summer only just started. But we're kicking off the new month with some fresh stock picks, explaining how you can invest in pharmaceuticals, and diving into one of Warren Buffett's favorite metrics — that may suggest a market crash is coming. – Katie Carrera, Stock Up Editor 5 Top Stocks to Buy in August --------------------------------------------------------------- Every month we ask five of our Motley Fool contributors to [suggest a stock that belongs in your portfolio]( — or at least warrants a close look. Read on for details about the companies they selected: Whirlpool ([NYSE:WHR]( Oceaneering International ([NYSE:OII]( International Business Machines ([NYSE:IBM]( iRobot ([NASDAQ:IRBT]( and Abiomed ([NASDAQ:ABMD](. Buy, Rinse, Repeat: Whirlpool [Sean Williams]( Recently, a handful of brand-name companies that are market-share mavens in their respective industries have taken it on the chin; but none looks cheaper than appliance giant Whirlpool. Whirlpool's issues are twofold, based on its recently reported second-quarter operating results. First, its U.S. appliance business took a hit as higher raw material costs for aluminum and steel (as a result of tariffs) forced it to raise its prices, and second, its EMEA segment (Europe, Middle East, and Asia) saw sales decline by 12.3% from the year-ago quarter. Both of these factors coerced management to reduce full-year adjusted EPS guidance to a new midpoint of $14.50 from a previous midpoint of $15. There's never a good way to spin an earnings guidance cut, or the company's need to raise its prices in the U.S. as tariffs take their toll. But consumers are far more resilient than Wall Street gives them credit for and Whirlpool maintains solid market share in North America as a well-known brand. Additionally, it's a company that has the ability to hedge against economic downturns. Management has also done a [good job of expanding into Asia]( which offers substantially better top-line growth prospects than North America. The region boasted a nearly 15% sales increase during the second quarter. Finally, Whirlpool is cheaper than it's been in a decade. The company's forward price-to-earnings ratio hasn't been below 9 since the year 2008. And, as icing on the cake, it's paying out 3.6% yield, which is nearly double that of the S&P 500. A recovery on the horizon: Oceaneering International [Todd Campbell]( Not long after Oceaneering reported its second quarter financials on July 25, five Wall Street analysts increased their 2019 earnings estimate for the company. That may only be the beginning of an ongoing shift in sentiment for the company from bad to good. I believe that capital expenditures on offshore projects are finally bottoming. If I'm right, then utilization - and eventually, pricing - should rebound for Oceaneering's remotely operated vehicles (ROVs), which are used by oil companies to install subsea hardware, inspect pipes and facilities, and for maintenance and repair jobs. We're already seeing demand for these ROVs perk up. The company reported ROV utilization was 54% in Q2, up from 44% in Q1, and because ROVs delivered more operating days last quarter, Oceaneering's companywide revenue improved 26% sequentially to $479 million. Oceaneering's recovery could be lumpy, though, and I could be early in recommending shares. After all, its revenue is still declining on a year-over-year basis and it's still posting quarterly losses. But I think a slow recovery is the more likely risk to this company than a retreat to its lows. Management thinks the second half of 2018 should be better than first half, and interest in offshore projects requiring ROVs should improve if oil prices continue to cooperate. Given that backdrop, adding this one to portfolios still makes sense to me. The market is ignoring this comeback: IBM [Tim Green]( With three straight quarters of revenue growth under its belt, IBM's multi-year transformation finally has some momentum. Growth is slow - sales jumped by just 2% in the second quarter adjusted for currency - but that's the strongest performance from IBM in years. Declining legacy businesses are still taking a toll on the top line, but the company's growth businesses are picking up the slack. Despite the return to growth, the market refuses to give IBM credit. The stock is basically flat over the past year, and its down about 33% since peaking in 2013. Based on the company's guidance for full-year adjusted earnings, the stock sports a price-to-earnings ratio of just 10.5. And thanks to more than twenty years of relentless dividend growth, shares of IBM yield 4.3%. Beyond valuation and the dividend, what's the reason to invest in this century-old tech giant? IBM still has some key competitive advantages, including deep relationships with long-time customers and a broad portfolio of products and services that allows it to sign massive cross-technology deals. [A recent Whole of Government agreement with Australia]( covering hardware, cloud computing, artificial intelligence, blockchain, cybersecurity, and quantum computing, is a prime example of these advantages at work. With IBM stock still depressed, August is a great time to pick up some shares. If the company can keep the momentum going, it's hard to see the stock trading at such pessimistic levels forever. Welcome our (helpful) robot overlords: iRobot [Steve Symington]( Shares of iRobot [soared more than 20%]( in a single day after the home robotics leader delivered far better-than-expected second-quarter earnings and increased its forward guidance. But considering the stock is still down more than 25% over the past year — largely a consequence of a post-earnings plunge in February after Wall Street balked at its initially conservative full-year outlook — I think patient investors still have plenty of time to step in and watch its story unfold. For perspective, that earlier decline came as iRobot consciously chose to forsake some profits in favor of investing to drive top-line growth. Last quarter not only did iRobot's flagship Roomba line enjoy strong sales, driven in part as a featured product for the fourth straight year during Amazon's annual Prime Day event, but sales of its smaller Braava floor-mopping bots also soared 50% year over year thanks to international demand. What's more, iRobot recently doubled the size of its revolving credit facility to $150 million, a move it says will provide added flexibility to implement its global growth strategy. For shareholders willing to buy now before the success of that strategy is more evident, I think iRobot stock could have years of market-beating returns ahead of it. A fallen angel: Abiomed [Brian Feroldi]( Few companies have been as red-hot in recent years as Abiomed. The medical device maker's stock is up more than 12-fold over the last five years alone. That's a truly ridiculous move in such a short period of time, but a look at the numbers suggests that Wall Street's recent love affair is justified. Abiomed's revenue and net income have grown by 279% and 1,430%, respectively, over the same time frame. Recent results show that Abiomed's ultra-fast growth rate isn't slowing down anytime soon, either. The company just [cranked out]( revenue and net income growth of 36% and 135%, respectively, in its first quarter. The huge numbers were driven by the continued rollout of its Impella temporary heart pump system in the U.S. and fast growth in international markets like Germany and Japan. The prosperity enabled management to boost revenue guidance for the full year and reaffirm margins, too. In spite of the broad-based prosperity and ample growth opportunities ahead, Abiomed's stock has been in free fall — shares are down more than 20% from their recent high. The decline appears to be attributable to a slight miss in the recent earnings report after adjusting for the effects of a tax benefit. I think this recent dip is providing investors with a rare opportunity to buy into this hyper-growth story at a modest discount. While shares can hardly be called cheap — the stock is still trading for 72 times next year's earnings estimates — I think that Abiomed is a such a high-quality business that the premium is more than justified. --------------------------------------------------------------- This week, in 2006: Elon Musk, the co-founder and CEO of Tesla ([NASDAQ:TSLA]( shared his "Secret Tesla Motors Master Plan," which (summarized) was to build a robust range of affordable, electric cars. But it's struggling to keep up with demand. According to [Bloomberg]( the company has manufactured more than 57,000 of its Model 3s — its first car with a relatively affordable price — since it launched in July 2017. --------------------------------------------------------------- Long Read: How to Invest in Pharmaceutical Stocks Growth. Value. Dividends. The pharmaceutical industry is one of the few Wall Street sectors that caters to nearly any investing style or strategy. Whether you're looking for the relative safety of established dividend stalwarts like Johnson and Johnson ([NYSE:JNJ]( or the potential for explosive returns with early-stage, high-growth-oriented biotechnology companies like bluebird bio ([NASDAQ:BLUE]( there are hundreds of pharmaceutical stocks, ETFs, and mutual funds to choose from. But determining what makes one stock or fund a good investment over another can be tricky. How should an investor evaluate the inherent risks — and avoid the potential pitfalls — in an industry that can be anything but predictable? With an estimated $180 billion expected to be poured into pharmaceutical research and development through 2022, how do you know when you've found the next big thing? Though investing in this space can be intimidating, the key is understanding some fundamental components. [This article offers a thorough breakdown of everything you need to get started]( pharmaceutical basics, the industry's investment potential, how to evaluate quantitative and qualitative aspects of pharmaceutical companies, the risks in the drug development process, and more. FEATURED PODCAST --------------------------------------------------------------- [Motley Fool Answers]( Facebook's Next Chapter? Our analysts weigh in on some of the big stories from recent earnings reports, including: Facebook's plummet on slowing growth, Amazon's rise on record profits, and Spotifiy's effort to produce sweet music for investors. [Subscribe on iTunes]( --------------------------------------------------------------- What Apocalypse? 3 Retail Stocks With Staying Power Retail stocks have been under fire lately as the trend of online shopping surges forward. That doesn't mean that the entire retail industry is off limits for investors. Some companies are more immune to the changing dynamic wrought by e-commerce, while others have cracked the code to keep customers coming back. [Check out the full story for more details]( on why Motley Fool contributors singled out these three companies as ones that should be able to keep thriving amid a changing landscape. - It wasn't that long ago that Best Buy ([NYSE:BBY]( was vulnerable to the growing dominance of e-commerce. Then it turned the narrative on its head by finding ways to entice customers to make purchases and blurring the line between online and brick-and-mortar retail with in-store pickup of online orders. The stock has returned more than four-fold under CEO Hubert Joly, who arrived in late 2012. In its most recent quarter, Best Buy was able to increase its comparable store sales by 7.1% year over year. Revenue increased by 6.8% year over year, and adjusted earnings per share went up 25% compared to the prior-year quarter. Investors looking for the top retail stocks to buy now need look no further than Best Buy. — [Danny Vena]( - Arts and crafts materials retailer The Michaels Companies ([NASDAQ:MIK]( holds a leading position in a retail segment with unique resistance to e-commerce attacks, because its customers like to see and touch items before purchasing them. The company edged past analyst estimates in June's first-quarter report, but its stock plunged due to modest guidance for Q2. Keep in mind that the second-quarter forecast came in a bit low because Michaels is remodeling the majority of its stores in preparation for a stronger third-quarter holiday season. Management hasn't changed its full-year projections, though, and just accelerated its stock buyback program. With the stock bouncing back but remaining at an affordable 8.9 times forward earnings, the buying window is wide open. — [Anders Bylund]( - Kroger ([NYSE:KR]( America's largest grocery chain, has embraced a serious plan to incorporate digital sales tools. Among the changes so far: The number of stores that support digital ordering and pickup scheduling technology has grown to more than 1,000 and plans to expand are on tap. Kroger's digital business grew 90% in 2017 and 66% in the first quarter of 2018, while comparable sales across its stores and digital initiatives increased 1.9% year over year to start the year. Total sales and adjusted earnings were up 3.4% and 25.9%, respectively, in the first quarter as a result. The grocery business isn't the most exciting of industries, but Kroger looks too cheap to ignore as it makes inroads into the world of digital retail. — [Nicholas Rossolillo]( --------------------------------------------------------------- This message will self-destruct in 5...4...: Mission Impossible - Fallout, the sixth installment of the action blockbuster series starring Tom Cruise, hauled in more than $61.5 million in North America and $153.5 million worldwide in its opening weekend — a record for the franchise. And it boasts a 97% fresh rating on Rotten Tomatoes. That's a lot of people enjoying some crazy stunt work. --------------------------------------------------------------- One of Warren Buffett's Favorite Metrics Tells Us a Stock Market Crash Could Be Coming [Nicknamed "The Buffett Indicator"]( by the financial community, this metric divides the total market capitalization of all U.S. stocks by the latest gross domestic product (GDP) to give an overall feel for the valuation of U.S. stocks. (Remember that as an investor, you should incorporate many different metrics when trying to buy or sell.) Is it reliable? To be clear, no stock market metrics are 100% reliable at predicting corrections, crashes, rallies, or stagnant stock markets. That being said, the Buffett Indicator, while not flawless, does tend to peak during hot stock markets and bottom during weak markets. As a general rule, if the indicator falls below 80%-90% or so, it has historically signaled that stocks are cheap. On the other hand, levels significantly higher than 100% can indicate stocks are expensive. For context, the Buffett indicator peaked at about 145% right before the dot-com bubble burst and reached nearly 110% before the financial crisis. Even if it signals that stocks are cheap doesn't mean they won't get even cheaper, and the same is true for stocks that look expensive (like now). But the Buffett Indicator can tell you the valuation of the stock market in a historical context right now. It doesn't predict tops or bottoms. Where's the indicator at now? The Buffett Indicator stands at over 143% — the same neighborhood as the peak we saw during the dot-com bubble. Just last week, the total market cap to GDP ratio sat at nearly 149%, aka the highest it has ever been. There are some good reasons for high valuations, such as the new, lower corporate tax rate, the generally business-friendly administration, a prolonged period of historically low interest rates, low unemployment, high consumer confidence, and soaring corporate earnings, just to name a few. The fact that the Buffett Indicator doesn't take some of these things into account is perhaps its biggest flaw. Should investors worry? While the Buffett Indicator is certainly a great snapshot of stock valuations, it's not a stand-alone metric that you should use to determine when to buy or sell. With that in mind, the fact is that the Buffett Indicator has been flirting with its highest point in history. That doesn't necessarily mean that the tides will turn anytime in the near future, but it may be a smart idea to start thinking a little defensively. TWEET OF THE WEEK --------------------------------------------------------------- [Tweet of the week: A financial parable. There's an old story about a guy taking a smoke break with his non-smoking colleague. How long have you been smoking for? the colleague asks. Thirty years says the smokerThirty year! marvels the co-worker. That costs so much money. At a pack a day, you're spending $1,900 a year. Had you instead invested that money at an 8% return for the last 30 years, you'd have $250,000 in the bank today. That's enough to buy a Ferrari. The smoker looked puzzled. Do you smoke? he asked his co-worker. No. So where is your Ferrari?]( [See all our Tweets]( Join the 1,300,000+ people who follow us! [Twitter]( [Facebook]( We work fervently, feverishly, and Foolishly to make sure all the facts and figures we publish in our emails are 100% accurate and up to date. Returns as of July 31, 2018. Our mailing address is: The Motley Fool | 2000 Duke St. | Alexandria, VA 22314 Want to change how you receive these emails? You can [update your preferences]( or [unsubscribe from this list](. 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