Grow Your Portfolio With These Retailers

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Anyone who has read any of my posts knows how much attention I pay to stable cash flow generation. That's the reason I always favor consumer goods companies or the consumer sector in general. This time I bring you a portfolio of three companies in the consumer space that are beating expectations and resharpening their strategy to continue to outperform the market. The three of them operate mainly in the recovering US economy and are retail champions.

CVS Caremark (NYSE: CVS) is the retail business that sells health care products and services across the US. The company, trades at $46.60 and is up by 14% in 2012, but I think we can expect further upside. Just to make a point on management's quality, for Q3, CVS reported that it beat expectations and once again raised its outlook (this is the third consecutive quarter of outlook improvement). Adjusted EPS of $0.85 exceeded consensus of $0.83 despite a higher than expected tax rate. I think its a great story built by even greater management. Its current dividend yield is low at 1.4%, but I think its poised to grow over time at an average 15% Year over Year (YoY) rate. CVS, with its net debt to EBITDA at x1, trades at 2013 12.4x P/E and 7.3x EV/EBITDA. I love this well managed business which is growing its top line at a 13% YoY rate. 

Whole Foods Market (NASDAQ: WFM) is the natural and organic foods supermarket. The company doesn't seem cheap, but has some advantages that explain the premium. WFM, with a market capitalization of $17 billion and no debt (-$1.3 billion net debt), is not only a very well managed business, but also an M&A candidate. The company, operating with a 2012 average EBITDA margin of 9% and growing EBITDA, revenues and EPS between 2011 and 2012 by 36%, 24% and 44%, respectively, is a great asset to own. Trading at a forward 2013 14.2x EV/EBITDA and 32x P/E its not cheap, but it deserves its price. WFM, selling at $91 per share, comes with a small $0.14 quarterly dividend. That said, I do not expect it to grow rapidly, but we may receive some good surprises in the meantime, such as the special $2 dividend payable this month. 

Starbucks Corporation (NASDAQ: SBUX), selling at $51, is trading at 2013 22.6x P/E and 12x EV/EBITDA. Even if it looks expensive, SBUX is debt free and implementing the right strategy. The purchase of Teavana (NYSE: TEA) is a good example of what SBUX is planning. The company is expanding in a way that it had never done before. Now there is a chance that its products never even make it to Starbucks stores. The company wants to translate its success in serving beverages, growing retail stores, international development and Consumer Packaged Goods (CPG) into its new investments: Evolution Fresh is expanding to CPG channels, La Boulange is headed to over 2,000 units and Verismo service is adding countries as we speak. With a 20% EBITDA margin and a renovated strategy for growth I believe SBUX has a long way to go. I expect its dividend yield for 2013 to remain low at 1.65% but always growing at a 20% YoY rate.

This three retail companies share great growth prospects and they all are well managed businesses. I like these companies since they can deliver great results for patient investors. Keep in mind, growth strategies have their risks, so size them before investing.

Fool blogger Federico Zaldua does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Starbucks, Teavana Holdings, and Whole Foods Market and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Starbucks and Whole Foods Market. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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