The allure of Wall Street is strong. The minute by minute news bites are exciting and the plethora of people involved in the slightest movement of the market are entrancing. They know their audience and how to draw you in into their captivating world.
The real question at the core of this is ‘what do you want from your investments?’ Do you want a source of entertainment or a solid portfolio to build your future? Answering these questions is paramount as to how you interpret the unending information that comes from Wall Street.
If you believe, as Warren Buffett and Peter Lynch believe, that true value from a stock comes from owing a part of a company and watching that company grow, then the ticker tape means little to you. You will get more from the periodic company earnings reports, and your time will be better spent in analyzing their contents than what Wall Street said five minutes ago.
Fortunes are not made overnight, they are tended and watered and eventually grow up much like I hope my teenagers eventually will.
As I contemplate these questions fro myself, I look at companies built to last not just beyond the next stock turnover, but for this earnings season and many more to come.
So in our journey to find companies that will last, the most important factor is to follow the money, so to speak. That means companies which make money, year over year, and don’t squander it or build up debt trying to expand their operations.
The Coca-Cola Company (NYSE:KO)
This stock is a Warren Buffett darling. The company, started by a pharmacist in Georgia in 1886, has grown into an international brand. The company has built a sustainable competitive advantage, and because it is affordable and consumable, it means customers need to keep coming back for more.
The business behind the stock boasts healthy profit margins, reliable dividend increases, and good return on equity. The touchy part comes when you look at the stock price. Recently, the stock has hovered near its 52-week high with a P/E of over 20. This is approximately equal to competitor PepsiCo, Inc. (NYSE:PEP) but lower that Wall Street darling Monster Beverage Corp (NASDAQ:MNST) that reaches over 25.
McCormick & Company, Incorporated (NYSE:MKC)
More boring stocks you say? How about McCormick & Company, Incorporated (NYSE:MKC) spices? With almost half the North American spice market, and twice the size of the nearest competitor, McCormick casts quite a shadow. It even created its own private label spices to tie up that end of the market. A company that posses this kind of head start is difficult to catch.
Due to its size and scale, its profit margins remain in a very comfortable zone. Its net margin of around 10 makes the industry average of 5 look dismal. Its return on equity is a solid 24% and debt levels are manageable. Its dividend yield leaves a little to be desired at less than 2%, but has grown consistently in the last 5 years – just not as fast as the stock price, thus the dip below 2%.
General Mills, Inc. (NYSE:GIS)
How about something we cannot live without? Food! Talk about repeat business. We are all familiar with General Mills, Inc. (NYSE:GIS) — Cheerios, Yoplait, Green Giant. The story here is not quite as bright as with Coke or McCormick & Company, Incorporated (NYSE:MKC) spices. General Mills has not had the same kind of consistent earnings growth.
It is difficult to raise prices on food staples in a tough economy, but the portfolio of brands is extensive and built for the long run. Feel free to peruse yourself. General Mills still boasts healthy profit margins and return on equity. Its dividend is over 2.5% with consistent growth, and P/E (around 18) is much more afordable.
Kellogg Company (NYSE:K)
Business is never all-good news. Kellogg Company (NYSE:K) is maybe one such story. It is a company with quality brands, even if they are mostly cereal, but the earnings numbers tell a much more depressing story. While its net income grew over 2011 levels, it is still behind 2008, 2009, and 2010. To make matters a little worse, debt levels have continued to climb. As of 2012, the net margin dipped below 7% for the first time in the last 10 years, making this debt harder and harder to pay back.
A bright spot may be the dividend, which is about 2.75% with consistent growth in the last five years, but how long that will last is conspicuous, given that their payout ratio has topped 65%. This may all be acceptable if Kellogg Company (NYSE:K) is now on the rebound, but with a P/E over 23, I have the feeling they are a bit too expensive to buy at the moment.
The takeaway
All in all, this exercise shows us the resiliency of solid companies in good and bad times. Looking at the business behind the stock prices may surprise some who attribute too much credence to the ‘mood of the market’ or the ‘efficiency of said market. The best advice is to do your homework so the risks of stock ownership are known. As per the saying ‘Buyer Beware!’
Candice Munroe has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and McCormick.
