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Now's the Time to Buy These Stocks

Maxx Chatsko, The Motley Fool

The U.S. economy is a little overdue for a recession. With painful memories of the Great Recession still relatively fresh, that word might make individual investors cringe, but a brief global slowdown doesn't have to be devastating. That's especially true for individual investors who buy great businesses at great prices and hold on for the long term.

So although there are a multitude of issues to fret about, ranging from trade wars to a stubbornly strong U.S. dollar, there are also buying opportunities for investors who know where to look. In times like this, the best stocks to buy might just be those that have a track record of beating the S&P 500 index over the long haul. That's a big reason -- but not the only one -- to consider buying lithium leader Albemarle (NYSE: ALB) and water utility Aqua America (NYSE: WTR).

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More than doubling output with committed customers

It may only be valued at $10 billion today, but Albemarle sported a market cap of over $15 billion a little over one year ago. While investors had no trouble rethinking that healthy premium at the first sign of trouble earlier this year, the lithium industry has long-term growth prospects that are tough to dispute. The company's own estimates, which are relatively conservative compared to others floating around, call for global lithium demand to grow from 220,000 metric tons (MT) in 2017 to 800,000 MT in 2025. That includes a 500,000-MT-per-year increase from transportation applications alone. 

The default stance of individual investors should be to take internal company projections with a grain of salt, but Albemarle actually has the supply contracts in place to support its ambitious long-term market guidance. The company exited 2017 with 65,000 MT of annual lithium production capacity, but that's expected to climb to 165,000 MT in 2021 -- and it has roughly 84% of that committed to supply agreements today. The business even has 140,000 MT of its expected annual lithium supply in 2025 entered into supply contracts, which represents about 62% of its expected production by that year. 

What's more, all of those contracts include selling prices at least equivalent to those enjoyed in 2018. Considering the lithium segment posted an adjusted EBITDA margin of 44% in the first nine months of the year, individual investors would be silly to dismiss the progress made this year securing supply agreements through the mid-2020s. Throw in the fact that Albemarle stock trades at just 15 times next year's earnings, or that the business is bolstered by two other overlooked and comfortably profitable segments, and long-term investors might not hesitate to buy shares now.

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Diversifying into natural gas should boost growth

Aqua America's pending acquisition of natural gas utility Peoples has some analysts scratching their heads. There's also some uncertainty about how the deal will get financed, so investors have sent shares 6% lower since the deal was announced, waiting for more details to emerge about the debt -- and the cost of that debt. Nonetheless, individual investors might find a lot to like about the business whether the deal goes through or not.

At an enterprise value of $4.75 billion (including assets and debt), the acquisition will significantly expand the water utility's portfolio, which itself boasts an enterprise value of $8.5 billion. Assuming the natural gas business delivers on its 10%-per-year growth estimate -- compared to just 7% for the water business -- then the financing shouldn't be as risky as Mr. Market is pricing in right now. 

Throw in the fact that 77% of all revenue at the new Aqua America would be generated in regulated-utility-friendly Pennsylvania, including from high-growth opportunities in residential and industrial natural gas deliveries in the western half of the state, and if the business delivers, then paying down debt shouldn't be an issue. There's one catch, though: The deal won't close until mid-2019.

If the deal doesn't go through for some reason, then the opportunity for investors would simply revert to the status quo. That is, investors would own one of the largest water utilities on the market with a track record of beating the S&P 500 over the long haul. It also pays a respectable 2.5% dividend yield. In other words, the usually stable stock's recent drop could be viewed as a buying opportunity no matter what happens with Peoples.

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Image source: Getty Images.

Buy great businesses at great prices

Preparation can make all the difference in investing. For instance, individual investors who have taken the time to understand the lithium markets and Albemarle's strategy for expansion might conclude that shares are cheap right now relative to a long time horizon. Similarly, Aqua America got pounded by announcing its surprise acquisition of a natural gas utility, but the rationale could lead to above-average wealth creation once the combined business gets going. Investors looking for great long-term opportunities should give these two stocks a closer look.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.