Three Powerful Consumer Brands Trading at a Discount
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Successful investing doesn't need to be complicated at all: buying high quality stocks when they are trading at discounted prices can be a very simple, yet effective, strategy for long term success. These three companies are among the most successful brands in the consumer sector over the last years, yet they are selling at a discount due to uninspiring earnings in the last quarter. Temporary setbacks in these long term outperformers may easily turn out to be buying opportunities for the strategically minded investor.
Shares of Nike (NYSE: NKE), Starbucks (NASDAQ: SBUX) and Chipotle Mexican Grill (NYSE: CMG) have a few things in common: they are among the most successful companies building reputable brands and gaining customer acceptation over the last years, and they have also delivered outstanding returns for their investors over that period. The chart compares the performance of these three companies versus the S&P Depository Receipts (NYSEMKT: SPY) ETF, which replicates the S&P 500 index, over the last five years, and the image is quite clear.
But the similarities don't end there. These three have done much worse than the index replicating ETF over the last three months, which for the most part can be explained by investors' reactions to disappointing earnings reports. However, none of these businesses has lost any of their long term attributes, so the recent pullback may be considered an opportunity to acquire some highly successful brands at a discount.
Nike is the undisputed leader in sports shoes and apparel. The Nike brand has been seen in memorable ads all over the world through many decades, and the company has sponsored many of the most renowned athletes and teams in a wide array of sports and disciplines.
Its leadership position has allowed Nike to invest more than its competitors in areas like research and development or marketing, which the company actually calls “demand creation expense” on its financial statements. Smaller companies with less geographical reach and smaller wallets just can't match Nike on those strategic areas, so the company uses its size advantage to continue differentiating itself from the competition.
Nike encountered some headwinds over the last quarter due to factors like higher inventory costs, lackluster demand in Europe and some weakness in China. But this isn´t the first time Nike has faced this kind of problems, and temporary setbacks have been buying opportunities in the past. Investing is a marathon, not a sprint, and this is the right kind of company to buy on transitory weakness in order to achieve your long term goals.
Starbucks mentioned it was seeing decelerating store traffic during its last quarterly update, and that has produced some concerns regarding short term financial prospects. But long term investors should focus their attention on the opportunities available for Starbucks over the next several years as opposed to the next months, and there is certainly no shortage of exciting projects at Starbucks over that time frame.
The company is expanding rapidly into high growth countries like China, India, and Brazil, which represent fantastic opportunities for growth and profitability over the next years. There will be challenges regarding customer habits and product adaptation, but the Starbucks brand is already very popular all over the world, and the company has enough variety of products to fit different tastes and local traditions.
In addition to international expansion, Starbucks has other interesting venues for growth, like packaged goods distribution, licensing partnerships, new food offerings, and a focus on healthier product alternatives. Its brand power and growth opportunities make of Starbucks one outstandingly strong company, and the stock price may be showing a window of opportunity for long term investors after the recent weakness.
Chipotle is probably the smallest and riskiest of the three companies, but it’s also the one with the highest growth prospects in the middle term. The company has been successfully leading the “fast casual” food industry, which means keeping the speed and informality of fast food but combining it with products of superior quality and better nutritional characteristics.
Prices are higher at Chipotle than in traditional fast food chains, around a $10 for a burrito and a soda versus a nearly $8 for a hamburger combo at its former parent company McDonald's (NYSE: MCD). The difference can be considerable in percentage terms, but customers seem more than willing to pay those extra $2 when it means fresh ingredients with a focus on sustainability and ecological standards.
The company has delivered outstanding growth rates in the middle term, with total sales increasing at a 22.5% annually over the last five years versus a much slower 5.25% growth in sales at McDonald´s over the same period. McDonald´s and other established players have been trying to join the trend with premium products and healthy alternatives lately, but none of these efforts have turned consumers away from Chipotle and its differentiated brand.
The last quarter was actually quite good for this organic burrito maker, but the stock had gotten ahead of itself trading at a P/E ratio above 50. Shares of Chipotle were vulnerable to the force of gravity once investors got a more realistic view of the business, and that adjustment seems to be still underway as Chipotle is currently trading at a P/E of 35 times. The cheaper this high growth company gets, the bigger the opportunity for investors.
Buying companies with strong competitive advantages when prices are on retreat is a well proven formula which has worked wonders over the long term. These three stocks fit that strategy pretty well now that investors seem more concerned about weakness in quarterly reports than long term value creation and the competitive strength of their brands.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks. Motley Fool newsletter services recommend Chipotle Mexican Grill, McDonald's, Nike, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.