Eat, Drink, and Profit...
04/07/2006 12:00 am EST
"Tobacco, food, and alcohol companies are overlooked sectors with very stable businesses," says Ivan Martchev, noting that Altria is the top performing stock in the S&P 500 for the past 50 years. Here, he looks at some favorites in these sectors.
"Altria (MO NYSE), aka Philip Morris, has a compound annual return of almost 20% for 50 years. It alsohas a dividend yield that’s twice that of the average S&P 500 stock, which definitely adds up over the years. Granted, Altria is controversial because of numerous smoking-related lawsuits. Yet the staggering damages sought previously have been reduced in the last couple of years to a mere $10 billion. Also, there’s word that the company is poised to implement shareholder-friendly strategies by further splitting up operations. Altria is a buy below 75.
"What’s more, Altria is still a major shareholder in Kraft (KFT NYSE), the largest food company in the US. Even though the Kraft brand name isn’t well known outside the US, the company has been expanding internationally for years and now has operations in 155 countries, second only to Nestlé. Kraft has been a disappointment since being partially spun off in 2001. But management is finally giving signals it’s serious about improving operational performance; the company is cutting 8% of its workforce to reduce costs while sales have rebounded noticeably. Kraft is a turnaround situation and we see much bigger upside than downside, but you will have to be willing to hang on for a couple years. Buy under 32.
"When it comes to liquor stocks Diageo (DEO NYSE) is the undisputed leader. Diageo isn’t a household name, but its brands Johnnie Walker, Smirnoff, Tanqueray, and Guinness are some of the best brands in their respective categories. And the list is much longer than that. Respected high-end Champagnes Dom Pérignon and Moët & Chandonare also part of Diageo’s large portfolio of brands. The company is a steady grower and a lot of its consistent performance is already reflected in its price. But as the business grows so will the shares. The stock trades at 15 times 2006 earnings and has an amazing return on equity of 38%. Buy Diageo below 62.
"If you want more excitement and upside potential—with increased volatility, of course—you have to be willing to invest in smaller companies that have room for growth. The risks are higher, but so are the potential rewards. An interesting turnaround situation is natural foods supermarket chain Wild Oats Markets (OATS NASDAQ). There’s been big growth in natural foods during the last decade. Given the small percentage of overall grocery sales fall into this category, the sector is likely to continue to grow much faster than the overall market at an 8%-10% clip.
"The category leader is Whole Foods, but the stock is too expensive to chase. Instead, Wild Oats offers an alternative play on the whole foods trend. Despite notably weak margins, there are definitive signs the company is on the mend. Wild Oats shares have been on a tear this year and some digestion of the gains is likely to come in the next couple of months. A good way to establish a position is to buy some at current prices and buy more when the shares pull back to 16.