'The Godfather' Strategy

 | Feb 08, 2013 | 10:30 AM EST  | Comments
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Young man, I hear you and your friends are stealing goods. But you don't even send a dress to my house. No respect! You know I've got three daughters. This is my neighborhood. You and your friends should show me some respect. You should let me wet my beak a little. --Don Fanucci, from The Godfather: Part II

I am a firm believer that an investor can pick up investment ideas and strategies from many aspects of life. Movies, especially, are a source of inspiration. Take The Godfather Part II. It contains numerous solid insights. One of the most obvious is that it's good to be the don. As young Vito Corleone learned from Don Fanucci, getting a piece of the action on the backs of every business in the neighborhood can provide a nice living. Sure, Don Fanucci met an inglorious end at the hands of Robert De Niro's character, but only after decades of making a lucrative living off all the business activity around him.

Finding these "toll takers" among equities can be a rewarding investment strategy. Here are two firms that are well-positioned to use this type of business model to reward shareholders for years to come.

Four reasons credit-card processor Visa (V) is a solid, long-term growth play at $157 a share:

  • The consummate financial-transaction troll is priced at 18.5x forward earnings, which is reasonable given that this global giant takes no credit risk and is benefitting from the continuing migration from cash and checks to credit and debit cards worldwide.
  • The company has beaten earnings estimates for five straight quarters and consensus earnings estimates for both 2013 and 2014 have risen over the last two months.
  • In a slow-growth world, Visa has more than doubled revenues since 2007. Analysts expect better than 10% sales increases for both 2013 and 2014.
  • The stock is selling in the bottom third of its valuation range based on price-to-earnings, price-to-cash-flow and price-to-book ratios.

Enterprise Products Partners (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, refined products and petrochemicals. It is paid a fee to carry these products, so it has little commodity price exposure. I would be hard pressed to be more passionate for the shares than Jim Cramer was the other day, but I will give it a go.

Four reasons EPD is a solid addition to an income portfolio at $55 a share:

  • The company has beaten earnings estimates for the last six quarters and consensus earnings estimates for both 2013 and 2014 have ticked up over the last month.
  • EPD yields 4.8% and has doubled distribution payouts over the last decade. It is a primary beneficiary of the continuing expansion of domestic oil and gas production.
  • Revenue growth is projected to come in at more than 13% in 2013 and the stock has a low beta of 0.71.
  • EPD has a strong balance sheet, diverse cash flows and strategically placed assets. It should be a core part of any energy master limited partnership income portfolio

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