Should You Choose Stability or Growth?

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

Have you ever thought about how you would go about tripping an arthropod with an estimated 1,000 appendages?  Well, I have.  I've looked at it from several angles now, and I believe the task to be nigh impossible.

It's easy to trip a human.  We have but two legs; simple math and physics tells us that if a creature is supported by two points, and you take one away, said creature will likely come crashing down to earth.  But now look at a millipede.  You could knock a couple hundred legs out from under them, and they'll just keep creeping along the floor of my office.  The principle?  If something is supported by many distinct points, it is harder to knock that thing down.  

You didn't click on this article because you are really interested in a scientific analysis of tripping the diplopoda; you are curious how this is going to apply to investing.  Here it is: diversification = stability.

With the fiscal cliff, Greece, and Egypt protests all battering the news, I think people are looking for a little investment stability.  It's cloudy out there, and a storm may be coming.  If we can invest in companies that achieve their income from diverse sources, we should get the stability we seek.

Diverse as Anyone

Walt Disney (NYSE: DIS) is one of the most diversified publicly traded companies.  They get their income from five main sources.

  • Amusement Parks and Resorts (i.e. Disneyland)
  • Media Networks (i.e. ESPN)
  • Studio Entertainment (i.e. Pixar)
  • Interactive Media (i.e. Games)
  • Consumer Products (i.e. Toys)

Income may not be evenly distributed across these five segments, but Disney could feasibly take a hit in one or two of these areas and still be fine over the long-haul.  

You may be surprised by me calling PepsiCo (NYSE: PEP) a diversified company.  They aren't as diversified as Disney, but it's important to note that Pepsi is not a one-trick-pony.  Pepsi is in the beverage industry and the snack industry.  Fellow blog contributor Daniel Sparks wrote a great article awhile back talking about the difference between Coke and Pepsi in this sense.  He also pointed out that Lay's is closing in on 50% of Pepsi's worldwide sales.  While Pepsi isn't extremely diversified, they are more diversified than most people think.

But perhaps the most diversified company of all is General Electric (NYSE: GE).  They derive their income from six main sectors.

  • GE Capital
  • Energy Infrastructure
  • Aviation
  • Healthcare
  • Transportation
  • Home and Business Solutions

As you can see, their income streams are as diverse as the rainbow.  Few companies can boast having the hands in both Aviation and Healthcare, for example.

All three of these companies will remain fairly stable through whatever wave of economic turmoil or shift in consumer trends that come their way.  They have plenty of legs to stand on.

Not So Much

But not all companies are so diversified.  Many companies are essentially publicly traded flamingos, standing on just one leg, begging for someone to knock it out from under them.  Coinstar (NASDAQ: OUTR) is one such company, in my opinion.  You may wish to point out that they have more kiosks than just the Redbox line.  But it's undeniable that 85% of total revenue from one source is dangerous.

I like Coinstar.  I love Redbox.  I think that they are poised and positioned for continued growth for the next 3-5 years, despite rumors of the demise of DVD's.  But despite my reasons for bullishness, I must confront the fact that if anything happens to Redbox, this stock is going to plummet.  This isn't stability for an economic storm.

The Trade-off

If you are looking for stability, you are likely saying goodbye to a home run stock.  

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DIS Net Income TTM data by YCharts

As you can see, Coinstar's net income growth since 2009 has been nothing short of spectacular.  The stock has been an absolute home run.  

But if you are looking ahead to economic turmoil, you'll want stability.  Disney, Pepsi, and General Electric can anchor you through the hard times.

In Summary

A stable company has diversified income.  These companies are able to take a hit in an income source without the whole being significantly impacted over the long-haul.  Your best chance at stellar growth comes from other, less diversified companies.  It's up to every investor to decide what level of risk he can tolerate.  If you are worried about the economic environment right now, just remember, you can't trip a millipede.

thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney, General Electric Company, and PepsiCo. Motley Fool newsletter services recommend Walt Disney and PepsiCo. 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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