9/27/2011 5:46 PM ET|
10 stocks you should know and love
In uncertain times, it can pay to stick close to home, investing in companies that make products you know and love. Consider Starbucks, Amazon, Estee Lauder and more.
If you want to know what stocks to buy in this uncertain market, here's a proven strategy.
Take a good look around at the products and services you use. Assess what's working, what's most important to you and what you refuse to give up even when times are tough.
Then consider that the companies whose products you know and love might also be stocks you'll love as an investor.
After all, from the time you sip your morning coffee to the moment you retire for the night on your memory-foam mattress, you're doing consumer research. That's especially true these days, when you're watching every dollar and talking with your friends about what products give you the most bang for the buck.
In short, don't ignore that experience. Use it to get a leg up on the professionals.
Sure, the folks on Wall Street have lightning-fast computers and armies of analysts. But they don't necessarily have a better read on consumers than you do. Because they don't make the same choices people on Main Street do.
Investing icon Peter Lynch -- who consistently beat the market while managing the Fidelity Magellan (FMAGX)fund -- famously made the case for "buying what you know" in his book "One Up on Wall Street," a must-read for investors. In the book, Lynch says he once netted a sixfold gain by purchasing shares of a company he checked out because his wife loved its pantyhose.
With that in mind, consider this list of companies that make products many of us use on an average day. Turns out some of the best-loved companies also have some of the best stocks in the market right now.
Starbucks for your morning joe
For an example of how investing in what you know works, consider Starbucks (SBUX, news). If you were paying attention as an investor a few years ago, you might have guessed the company had an overexpansion problem. The number of stores became a running gag long before the market caught on.
These days, when you stop for a morning jolt, you may notice that Starbucks shops are crowded once again. The coffee retailer has worked through its problems and is back on a steady growth path.
It's also telling that Starbucks' pricey coffee business is growing despite a slow economy. When the economy picks up, won't we all just go more often?
Of course, you may have made the switch to Keurig single-cup brewing machines; K-Cup coffee is hot. The company behind this coffee sensation, Green Mountain Coffee Roasters (GMCR, news), has seen revenue and profits jump recently.
But now's a good time to introduce you to the downside of the "buy what you know" approach to investing. Lynch himself cautions that loving a company's product is no reason to buy its stock. It is merely a clue; you still have to do your homework. And a check of Green Mountain Coffee Roasters raises several red flags. First, the company's stock has fallen sharply over the last few weeks. Next, since early May, insiders including the CEO, the board chair and the finance chief, have sold 1.8 million shares, or $172 million worth of stock, according to Thomson Reuters. I don't care how good their coffee is, that's a signal worth noticing.
Paying Exxon big at the pump
After coffee, it's time to fill up the car. Ouch.
Even though oil is down to aaround $85 a barrel, gasoline prices remain stubbornly high. In fact, gasoline still costs around $3.50 on average, nationwide, up from $2.70 a year ago, according to AAA. Bad news for your wallet, but here's the investing intelligence in all of this: If oil is down but gasoline is still high, oil companies must be raking it in. Indeed they are.
Of course, as a consumer you know Exxon Mobil, but you may not love it. You might if you were a shareholder, though. Exxon uses technology wisely to produce better returns on capital than its competitors do, and the company returns a lot of that money to shareholders. Over the past five years Exxon has returned more than $170 billion through dividends and share repurchases.
Healthy stop at McDonald's
If your lunch break occasionally takes you to McDonald's (MCD, news), you've no doubt noticed a change. Once trashed for ruining the nation's diet, the fast food giant has responded by rolling out an array of healthier options -- including wraps, salads, oatmeal and real fruit smoothies.
Consumers love 'em. McCafé beverage sales are rising, as are profits overall, at a time when many restaurants have languished. You might also have noticed upgrades to McDonald's restaurant décor and free Wi-Fi, which should also boost traffic.
In short, like Starbucks, McDonald's knows how to adjust to consumer demand. That makes it a company worth knowing and owning.
3 for workout time
Stocks you know and love can come in more specialized areas.
If you regularly hit the gym or going out for a jog, you may have noticed that yoga has now hit craze status. "Yoga studios are popping everywhere," says George Whalin of Retail Management Consultants, in Carlsbad, Calif. And the stylish yogi can't strike a half-lotus tree pose without dressing for the part.
This means a trip to Lululemon Athletica (LULU, news), for stylish -- and pricey -- yoga outfits. At a time when consumers are cutting back overall, yoga fans drove up Lululemon's second-quarter revenue 39.5%. Sales at stores open more than a year advanced an impressive 20%, and earnings leapt 73%.
Lululemon still has plenty of room to grow, with only 151 stores in North America. It is expanding in Australia, too. And its new Ivivva Athletica line of dance and gymnastics clothing for young girls is a hit so far in Canada, where the company is based.
But I'd be careful with this one, because the price is relatively high. The stock trades for 36 times next year's earnings and 9.5 times sales. In contrast, Abercrombie & Fitch (ANF, news), another name you probably know from the mall, goes for 13.4 times earnings and 1.4 times sales. So I'd buy a limited position in Lululemon or wait for pullbacks in price.
Another thing you might notice when you're out for a jog is that technical and lightweight running shoes, like the Free and LunarGlide models from Nike (NKE, news), are all around. Also hot: Nike's signature Kobe Bryant, LeBron James and Air Jordan basketball shoes. Nike sales jumped 18% in the second quarter, and profits rose 19%. Its stock is trading near all-time highs. And it has built a "quintessential brand" with solid appeal abroad, where it's selling to an emerging middle class in places like China and Brazil, says Sarah Henry, a consumer sector analyst at Manulife Asset Management.
Another way to capture this trend is by owning shares of Foot Locker (FL, news). It sells popular running shoes from all the vendors hitting this trend, and not just Nike, says Keri Spanbauer, a retail analyst with Thrivent Financial for Lutherans. "Part of the appeal of the trend is that it is very broad-based across brands," she says. In July, Foot Locker reported a sixfold increase in profits for the second quarter on a 12% increase in sales at stores open more than a year. "Those types of results are unusual right now in retail," says Spanbauer. Foot Locker also pays a 3% dividend yield.
It's hard to mention stocks people know and love without naming Apple (AAPL, news), which has taken over the world of gadgets with its iProducts. Apple sales hit their highest levels ever in the second quarter, at $28.6 billion, an 82% gain over the year before. The company sold a record 20.3 million iPhones -- way more than the 8.4 million sold in the same quarter a year ago. It also sold a record 9.2 million iPads, compared with 3.3 million a year earlier. Sales of iPods and sales at iTunes were also robust. The "halo effect" spurred a 14% increase in Mac sales. All of this drove net income up 125% to $7.79 a share -- impressive strength that makes Apple look like an interesting buy in the current weakness.
Third-quarter profits were slightly disappointing, though. And the death of the iconic Steve Jobs will hang over the company for a while. Plus, Apple shares go for around 400 bucks each -- a fair price for a giant so many know and love, perhaps, but a hefty investment.
In fact, I think a better way to play the iPhone -- and the trend toward wider use of smartphones in general to access Internet content -- is AT&T (T, news), because the stock is cheaper. AT&T shares have gone nowhere in the past year, in part because of concerns that it has lost its status as the exclusive vendor of iPhones.
But iPhone sales are still robust, smartphone sales overall are growing, ahnd so are wireless data revenues. Meanwhile, AT&T pays a 6.1% dividend yield while you wait for everyone else to realize that loss of iPhone exclusivity isn't going to be so bad, which will send share prices up.
Estee Lauder in the pink
You might have noticed a lot more pink nail polish and lipstick, as well as darker gothic shades, on the ladies around you of late. These are some of the trends supporting robust strength in "prestige," or luxury, makeup, according to NPD Group, which does consumer research. During the first five months of the year, prestige makeup sales increased by 9% in U.S. department stores, says NPD.
Three of the five hottest brands, Estée Lauder, Clinique and M-A-C, are all owned by Estée Lauder (EL, news). This helps explain why sales at the company advanced 13% in the past year, and net earnings jumped 34%. Shares of Estee Lauder have been weak, recently falling below $95 from above $108 earlier this year. But it's hitting the trends right. That, plus international growth in areas such as China, should support the stock going forward.
Amazon rules online shopping
If you find it hard to resist the convenience of online shopping, you are not alone. Sales in North America at Amazon.com (AMZN, news), in the second quarter grew an impressive 50%, pretty astonishing when you consider that retail sales overall were sluggish. And we aren't the only ones loving Amazon. Worldwide sales grew 44% in the second quarter. Besides offering a wide selection of stuff at decent prices, all in one place,
Third quarter earnings were disappointing, but sales remained strong. And Amazon has had a hit with the Kindle, which it hopes to replicate with a tablet it's launching to compete with the iPad.
A good night's sleep
For years, Tempur-Pedic International (TPX, news), commanded a niche in the premium mattress business by offering a firm memory-foam mattress for people who needed more support. But this excluded anyone who preferred a softer mattress -- about half the population. Then it rolled out a softer version of its mattress, called the Cloud, and sales have taken off.
"They came out with the Cloud, and they doubled their addressable market," says Eric Marshall, director of research and co-portfolio manager of the Hodges Small Cap Fund (HDPSX). "They have been growing at double-digit growth rates in environment where mattress and furniture sales are horrible." Sales have also been rising, a trend that probably has not played out. Plus the company just authorized a new share buyback program -- which should help you sleep at night if you own this stock.
Editor's note: This article was updated Oct. 30 to include data from recent earnings reports.
At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column. During the past year, he has suggested that subscribers to his newsletter consider purchasing Exxon Mobil.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
VIDEO ON MSN MONEY
I've got a great idea for all the protestors on Wall Street! Why don't you all start a commune where half of you can work and support the other half who don't.
Yes, it does take money to make money, but first, it takes hard work. This is often lost in politics. The curse of this nation is the people who feel they are entitled to a free ride. If you look at the government spending, most of it is "entitlement" money. I believe in a flat tax. Then, and only then will it be equal among all people - and eliminate the loop holes. Vote your heart - not your party. Dems and Repubs both have problems.
A Working Man said: "A wise man would be buying."
Archimedes was a very wise man too, until some Roman put a sword through him when he made the wrong decision... "Vo Victus."
History teaches these lessons over and over again but fools ignore them.
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