4 stocks that say Yum

One sector that turns up a promisingly large number of candidates that fit this paradigm is the consumer sector. Besides McDonald's, a preliminary screen on return on equity turns up Diageo (DEO), Nestlé (NSRGY), L'Oreal (LRLCY) -- which is more thinly traded that I'd like and also trades as OR.FP in Paris -- and Yum Brands (YUM), a stock on my watch list that I'll be adding to my Jubak's Picks portfolio.

These companies share a common strategy for growth -- to go into the world's big, developing economies. Yum, for example, is the fast-food leader in China, where the company has 4,500 Pizza Hut and KFC units. (If you're worried about the growth opportunities for Yum Brands going forward, I'd note that the U.S. has one Yum Brands unit for every $836 million in gross domestic product. In China, the ratio is one for every $1.6 billion in a much-faster-growing GDP. And Yum Brands has just started its expansion into India.)

Diageo, with a return on invested capital of 14.3% for the fiscal year that ended in June 2011, can't match McDonald's or Yum Brands by that measure. But it does boast an eye-popping return on equity of 41.1% in that period and has just announced that it will invest $1 billion to expand production of Scotch whisky for export to the fast-growing markets of Brazil and China. (The company owns the Bells, J&B and Johnnie Walker brands.)

Nestlé has been busy making acquisitions of chocolate makers and infant formula producers in China to build up a lagging share in that market. (Nestlé's recent moves to dump noncore parts of its business has made it tough to tell what the company's normalized return on equity and return on invested capital are. I don't think investors can count on the 71.5% return on equity or the 44.6% return on invested capital the company posted in the past 12 months to hold up. But something like a 20% return on invested capital looks possible.)

At L'Oreal, what the company calls "new markets," and Asia in particular, have become the drivers for sales growth. In the first quarter of this year, the company reported 22.6% sales growth from the Asia/Pacific region. That far outstripped the 13.3% growth from North America, the global cosmetics company's next-best-performing region. (The company barely made the 15% return on equity cut, however, with a trailing 12-month return on equity of 15.01%. Return on invested capital during that period was 13.8%.)

Be picky, even with giants

I don't think you want to make this strategy the one strategy that you pursue in your portfolio in this paranormal market. And I think you'd do well to turn that moderation into an advantage. Because you'll want to limit your exposure to this fundamental, long-term strategy, you can be very choosy indeed, and you should make sure that you constantly look to upgrade the stocks you pick.

So, for example, instead of buying L'Oreal simply to fill out a roster of high return-on-investment stocks, weigh L'Oreal against Coach (COH). Instead of the 15.01% return on equity of a L'Oreal, Coach comes with a trailing 12-month return on equity of 53.4%. Instead of a 13.8% return on invested capital at L'Oreal, Coach comes with a 53.1% return on invested capital.

A good slogan to keep in mind for this strategy in this market is to go for the very best -- because they're worth it.

Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Apple, L'Oreal, McDonald's, Nestlé, and Yum Brands as of the end of March. Find a full list of the stocks in the fund as of the end of March here.

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