3 Perfect Consumer Stocks
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Fool.com the CAPS community is made up of any user who has an opinion about a stock. The benefit of using a system like this to screen for investment ideas is the same as doing a grass roots poll on a subject. You aren't polling professional investors, but the common man or woman that does their own stock research. Peter Lynch once said that following the “smart money” doesn't always make sense as the smart money isn't always all that smart. In fact, he gave multiple examples where a common investor could exploit his or her “edge” on an industry to generate returns that would beat the market averages. With this in mind, I recently looked on the CAPS Screener to find stocks that the community upgraded from 3 or 4 stars to a perfect 5 star rating last month. In consumer stocks there were three companies that met this criteria and could be good investments at this time.
Archer-Daniels Midland (NYSE: ADM):
Archer-Daniels is in multiple businesses related to food. Demand for more food from less land is a seemingly endless process as the world population increases. ADM appears positioned to benefit from this trend, and this consistent business helps explain how ADM has turned into a dividend aristocrat with over 35 years of dividend increases. There is a lot to like about ADM today with its 2.6% yield and 10% expected growth rate in the next few years. The stock sells for about 10.5 times next year's projected earnings as well, which seems to represent a good value.
The company has run into trouble in the last three years growing its net income with a total decline of 36.6% during this time frame. However, even with net income down, ADM managed to increase its operating cash flow by about 8% in total. Business has picked up in the last year in particular, and you can see the positive effect on the company's balance sheet. Just four quarters ago the company had $1.71 billion in net cash and investments. Today ADM sits on almost $2.6 billion of cash and investments. The company also looks poised to continue its dividend increasing ways with a free cash flow payout ratio of just 32.09%. Growth and income investors should add ADM to their Watchlist today.
Diageo PLC (NYSE: DEO):
There might not be a better play in the market for the wild swings of the last few years than Diageo. After all, how many investors after watching their stocks swing wildly up and down wouldn't consider going home or to the bar for some Johnnie Walker, Captain Morgan, or Smirnoff? Diageo owns each of these brands and many others. The company will have some seasonality to its results since liquor sales occur more frequently around special occasions and holidays.
That being said, the company has shown consistent growth over the last three years with net income up a total of 24.62%. In addition, Diageo has grown net income while also increasing its margins. The company's gross margin has grown from about 58% two years ago, to 59% last year, and over 60% in the last twelve months. Diageo pays a respectable yield of about 2.8%, and their free cash flow payout ratio seems sustainable at about 71%. If there is one problem with the stock it is that investors are being asked to pay nearly 17 times next year's EPS projections for a company expected to grow at 10% in the next few years. While this isn't a ridiculous premium, investors would be wise to look for a pullback to create a better buying opportunity. You can keep up with Diageo by adding DEO to your Watchlist.
Nike (NYSE: NKE):
There aren't many people who are unaware of Nike. The company has a globally recognized brand. In fact, when newer athletic apparel companies are judged, Nike is usually the measuring stick used. The company has run into challenges over the last few years with net income up a total of 16.57%, but operating cash flow was down almost 40%. However, most of this decrease in operating cash flow was connected to large inventory write-downs in the last two years. If the company can appropriately manage its inventory levels, the next few years should look much better.
Investors seem confident that the company will do better than analysts expect based on the current valuation. The company is expected to grow earnings by about 8% in the next five years, but sells for a forward P/E ratio of over 16. When you add in the fact that the dividend yield is less than 1%, Nike needs to produce better than 8% growth to be a great investment. That being said, Nike has the size and resources to consider an acquisition of a company like Under Armour or Lululemon. There was a rumor floated months ago that Under Armour could be a target for Nike, but that is all it was, just a rumor. That being said, if these two companies continue to grow quickly, the increased competition and attractive faster growth rate could make either one a target for Nike. If the company does not make an acquisition like this, investors should probably be patient and wait for a better opportunity before jumping in to buy shares. Keep up with Nike by adding NKE to your Watchlist to look for just such an opportunity.
What all three of these companies have in common is that they sell products that consumers use on a regular basis. Each company is expected to grow earnings by 8-10% in the next few years, and each one pays a dividend. If the global economy improves, each of these companies will benefit. The CAPS community believes in each of these companies more than they did just a month ago as well. If you are looking for growth and income, look no further than ADM, Diageo, and Nike.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Archer Daniels Midland Company and Nike. Motley Fool newsletter services recommend Diageo plc (ADR) and Nike. 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!