Strategies for Maximizing Your Income Stocks Holding: Insights and Investments

Investment strategies can be highly personal, tailored to an individual's goals, risk tolerance, and financial situation. This article aims to explore how the choice of income stocks aligns with strategic investment plans, focusing on the example of Carters (CRI) and financial institutions. This isn’t a recommendation and you are not my client. However, it’s based on my goals and risk tolerance, which may differ from yours. Let’s delve into the reasoning behind the investment choices and the potential returns.

Understanding Carters (CRI): A Baby Clothing Mystery

My largest holding across accounts is Carters (CRI). This company, operating in the baby clothing and accessory market, stands out for several reasons. The historical Earnings Per Share (EPS) growth rate of 13.68% coupled with a dividend yield of 4% and an estimated EPS growth rate of 10% make it a compelling investment, especially given its current price per earnings (PE) ratio of 9 and an earnings yield of 11%.

One might argue, “could it could be a good investment?” Let’s break down why Carters, in my case, has become a significant holding.

Core Reasons for Investing in Carters

The primary reason for investing in Carters lies in the essentially non-discretionary nature of their business. There are two things in life people never go after generic replacements for: Their kids and their dogs. This makes the demand for baby clothing and accessories virtually inelastic.

Moreover, if an economic slowdown occurs, the impact on this industry could be less pronounced. According to historical data, Carters' Price-to-Earnings (PE) ratio was 17, which implies a discounted price today. If earnings were to significantly fall short of the estimated numbers, the inherent value is substantial. A more conservative forecast using the average EPS growth from 2010 to 2019 (11.63%) and a PE of 17 suggests a reasonable range for pre-pandemic valuation. An even more conservative estimate considering a growth rate of 8% and a PE of 15 would result in a post-earnings estimate value of around 8.41 by 2024.

Risk Assessment and Potential Returns

In case the 2022 estimate of 8.95 EPS doesn’t materialize, we could use the average EPS growth from 2010 to 2019 (11.63%) and a PE of 17. However, to be thorough and extra conservative, let’s assume a EPS growth of 4% and a PE of 15.

Assuming EPS growth of 8% from 2017 to 2022, we calculate the EPS for the year-end 2022 as 7.77, and if it slows to 4% further, the EPS in 2024 would be 8.41. If the PE remains at 15, the share price would be 84, potentially yielding an annual return of 11%, with the added benefit of a 4% dividend yield.

Financial Institutions: A Diverse Portfolio

My selection of financial institutions as my largest stocks is driven by their higher risk profile and the fact that with a couple of dollars invested, a significant return is more likely due to their low share price. For those with limited funds to invest, choosing these types of stocks can be more beneficial.

Lloyds Banking Group and NatWest Group are among my top picks. These companies offer a balance between growth and stability, often providing higher dividends and opportunities for capital appreciation. Lloyds and NatWest’s dividend yield is particularly appealing, offering a reliable income stream in a volatile market. Additionally, their business models are largely based on offering essential financial services, which tend to be less affected by broader economic downturns.

Amazon and Apple also feature prominently in my portfolio due to their strong growth potential and consistent track record of innovation and performance. While these companies are high-risk, high-reward, they have shown resilience and growth over the years, which can be attractive to investors looking for substantial returns.

Conclusion

Choosing the right income stocks involves a careful analysis of financial health, growth potential, and risk tolerance. Carters (CRI) and financial institutions like Lloyds Banking Group and NatWest Group are examples of strategic holdings based on a deep dive into historical data and conservative forecasting methods. While these aren’t recommendations, they showcase how a thoughtful approach to investing can lead to potentially rewarding outcomes, even in uncertain economic times.