Some investors spend a lifetime searching for the holy grail
ofinvesting thatwill help them find the best companies and
opportunities. That quest for a magicbullet has given birth to
all kinds of strategies and techniques, fromfundamental analysis
to day trading.
But sometimes, keeping things simple is the easiest path to
success. That's the message that my colleague Elliott Gue, editor
, emphasized in an article last month. Elliott's message is
clear: Companies with extremely loyal customersoffer huge
benefits to investors because the connection that loyal customers
have with their favorite brands has a powerful effect on a
company'sbottom line .
Think about customers who love
Starbucks (Nasdaq: SBUX)
: Drinking Starbucks coffee isn't just about coffee -- it's also
a status symbol. The message is "I am smart and successful, and
therefore I can afford to spend alot ofmoney on this cup of
Loyal customers are also more predictable because they are less
susceptible to fluctuations in theeconomy and employment.
Ineconomics , this is referred to aselasticity of demand. That
played out for
in 2009, when the company's annualrevenue of $23 billion was
onpar with 2008's $23.5 billion while other companies saw revenue
plummeting in response to the financial crisis.
Starbucks and McDonald's are world-class brands with extremely
loyal customers -- but I've found another group of companies that
takes the premise of loyalty to another level.
So-called sin stocks capture the loyaltyfactor while adding an
important layer of devotion: addiction. A beer lover with an
Boston Beer Co.'s (
Samuel Adams is unlikely to trade down to during arecession .
Similarly, someone who smokes Marlboro cigarettes is unlikely to
give up that brand when wage growth slows.
Sin stocks also frequently pay an outsizedividend , another
factor making them a great fit for
. That makes investors loyal to sin stocks in addition to their
highly devoted customers.
My seven favorite sin stocks:
From the list, I have chosen to highlight Boston Beer Co.
because of its upward momentum and smaller size and
Reynolds American (
because of itsdividend yield .
Boston Beer Co.
One of the country's leading specialty brewers, Boston Beer Co.
is known for its Samuel Adams line of premium brews.Shares have
been surging, up 35% in the pastyear and 75% in the past two.
Analysts expect moregains , calling forearnings growth of 11% in
2013 and 13% in 2014. Despite the company's recent gains, shares
still look reasonably valued, trading with aPEG (price/earnings
to growth) ratio of 1.78, less than its 10-year average of 1.87.
Reynolds American is a cigarette and tobacco company with amarket
cap of $26 billion. Its line of products includes such leading
cigarette brands as Camel, Kool and Pall Mall.
Reynolds has also been on the upswing, with shares up 12% on the
year and 24% in the past two. Although growth projections are
modest, with analysts calling for 14% earnings growth in the next
two years, Reynolds carries a dividend of 4.9 %.
Risks to Consider:
Sin stocks have seen big gains in the past few years as
investors have piled into companies paying an outsize dividend
yield. That has pushed valuations above long-term averages, which
could trigger awave of profit-taking if the market shifts
Action to Take -->
Loyal customers offer huge benefits to both companies and
investors -- and these seven stocks have some of the most loyal
customers in the world. From this group, I particularly like
Samuel Adams because of its upward momentum and Reynolds American
for its dividend yield.
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