The Benefit of Diversification

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

Most investors would agree that it is probably not best to put "all your eggs in one basket." If people invest in several companies in a few different industries, their portfolios will not be as volatile as others. Therefore, these next few companies have nothing in common - besides the fact that they are publicly traded and just released earnings reports like every other publicly traded company. 

Yahoo! (NASDAQ: YHOO) posted higher than expected earnings for the fourth quarter. Reports were released Monday evening, and by mid-day on Wednesday the stock price had grown roughly 1.5%. Since Marissa Mayer became the CEO of Yahoo! the stock has soared approximately 35%. She has brought life back to the company after a few years of dormant behavior. The balance sheet for Yahoo! looks good, but as with some other companies, investors want to know what the company will do with its extra cash.

It is good to see Yahoo! starting to head in the right direction, but there are still some major concerns. With single digit growth in sales, their competitors (like Google and eBay) are posting revenue growths around 20%. As Warren Buffett always talks about, find a company with a durable competitive advantage. This is more difficult to do with Yahoo! than some others. Successful tech companies have moved into a "mobile" mindset, and Yahoo! doesn't have much in that area. They don't have their own browser, tablets, operating systems, smart phones, or hardware. 

Marissa Mayer seems to understand this, and seems focused on growing what compatibilities they do have in the mobile world. Yahoo! seems to be improving in the app world. Although other companies seem to be far ahead in the mobile world, Marissa has done a remarkable job so far as the company's CEO. With that said, her honeymoon period is over. For the success that she and the company have enjoyed, it only seems to get harder from here. Marissa does deserve a little bit longer to get this company turned around - after all, her job is to maneuver the battleship out from the mud. Yahoo! shows potential, but should be a diversified investment. 

Harley Davidson (NYSE: HOG) had mixed results in their report. They showed higher sales of motorcycles in the United States and abroad, yet their profits and revenues decreased. It was interesting to see that their unit sales were up. The company has been spending a lot of energy and time on restructuring the business and making some investments, and investors should benefit from this. Harley Davidson expects around $320 million of cost savings each year for the next few years. This should lead to higher profits down the road. 

Harley Davidson's stock has had quite a run, as it recently hit a five year high. Nearly all of Harley Davidson's competitors are private, which most investors view as a negative. The problem with this is that many private companies are not necessarily concerned with profit. They can cut prices and make less to compete with publicly traded companies without concern for any shareholders. Harley Davidson is a strong brand, a well run company, and has out-performed the S&P 500 by 15% in the past six months. Because of the success the company has had, it is priced very richly. The FCF yield for the stock is 4.7%, actually cheaper than I would have anticipated. 

Jos. A. Bank Clothiers (NASDAQ: JOSB) announced that profits for fiscal year 2012 will be 20% lower than a year ago. The company blames a variety of factors for this, including Hurricane Sandy, the presidential election, the fiscal cliff, and the unseasonably warm weather. Shares fell 18% early Monday morning upon the news. The company's strategy is sneaky; it generally marks prices up and then gives free items away with the purchase of an over-priced item. However, this strategy may actually tarnish the brand. When people walk out with free items, do they not think less of the free item they received? Can the company continue their "Buy one suit, get two free" philosophy? 

Despite the apparent deficiencies above, the stock has performed very well in the past decade. They have consistently out-performed competitors, and even the S&P 500 by over 500% in the past decade. The biggest question for Jos. A. Bank is how does a growing company like them continue to expand its market share? The company hasn't done a very good job of this in the past two years. Its stock has shown this, as it is down almost 17% in the past year. 

Finally, the company is debt free, shows cash on the balance sheet, maintain double digit net margins, and plans to open an additional 45-50 stores in 2013. The question is whether or not they can grow the market. Their strategies have paid off well up to this point, but when will they run out of people to market too? 

The Foolish Conclusion...

These three companies all have issues to overcome, as well as some bright spots. I would be very hesitant to invest heavily in any of them, but open minded to investing with the goal of diversification. Jos. A. Bank's might have tapped out their market, but have performed very well historically. Harley Davidson may be a victim of their own success as the stock is now pretty pricey. Yahoo! has very stiff competition and lacks a market for virtually anything mobile - yet they seem to have found a very good CEO. Remember, don't put all your eggs in one basket - invest with diversification in mind. 


tlwofford has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure