A Great Stock for New Investors
byOct 22nd 2011 7:30AM
What makes a great stock? A great stock is first and foremost a great business: It's profitable and well-run and has excellent prospects for growth over time.
That's the simple list. Obviously, the details behind these broad must-haves are where a company's potential and pitfalls are revealed. And with some businesses, those details can get fiendishly complicated.
But if you're someone who is new to stock investing -- maybe even looking for your very first stock -- you're looking for a slam dunk: a company you've heard of, with a business that's not hard to understand, a great reputation, and a track record that will let you sleep soundly at night -- and most important, those great prospects for growth over the long term.
That sounds like a high bar, but the company I have in mind might be in front of you right now -- or at least, in your kitchen.
A Great Investment Right Under Your Nose
Surely you're familiar with the brands owned by PepsiCo (PEP). Even if you don't have a few cans of Pepsi in your fridge, you probably see PepsiCo products dozens of times each day.
PepsiCo isn't just a soda company. It's a snack-food giant with over a dozen brands that each generate $1 billion or more in annual revenue. We're talking big, big, names, like Doritos, Tropicana, Quaker, Lay's, and Gatorade, in addition to the world-famous Pepsi family of sodas.
Organizationally, the company is divided into six divisions, of which the biggest and most important is snack colossus Frito-Lay. Frito-Lay, with its famous chip brands -- add in Fritos and Cheetos, among others, to the ones mentioned above, massive brands we love even if our waistlines don't -- dominates the U.S. snack market and is showing strong growth overseas.
A Big Consumer Company -- With Surprising Growth
The company's products might seem like entrenched staples here in the U.S., and sometimes that suggests a situation where there's not likely to be much growth over time. That in turn can mean a stock price that doesn't do much growing, either. That's not the story with PepsiCo.
PepsiCo is finding plenty of growth, particularly overseas. Consider: Through the third quarter, volume in the company's snacks businesses is up 7% year-to-date over last year, and 6% in beverages -- and those gains drove a 13% increase in net revenue for the third quarter versus comparable numbers from last year.
That's big growth for an already-giant consumer products company. Better yet, it's pretty typical for PepsiCo, thanks to rock-solid brands and great, steady management. That steady management (and steady profits) means that the company's 3.3% dividend yield is one you can count on.
But there's more to what makes PepsiCo special.
The Importance of the 'Moat'
One of the things that legendary investor Warren Buffett of Berkshire Hathaway (BRK.B) looks for in his investments is something he calls a "wide moat" -- and PepsiCo has a great one. Its brand and distribution channel are hard to beat.
Think about all the little corner convenience stores and gas stations where you see a Pepsi cooler or bags of Doritos and Cheetos by the register: How did they get there? And more to the point from an investment perspective, if you were starting a new company from scratch, how could you compete with that?
You'd need some heavy-duty marketing muscle to start. You'd have to be living in a cave to be unfamiliar with PepsiCo's marketing. The ads and billboards and logos are everywhere.
You'd need an army to get your products where they need to be. That requires a rock-solid distribution system. PepsiCo already has that -- and is making it work even harder. The company has been able to add to its basic soda-pop business with brands like Frito-Lay and Gatorade because those items ride those same trucks to all those big and little stores.
In order for a company to compete with the snack-food behemoth, it would need to make massive investments to build the distribution system and brand awareness that PepsiCo (and Coke) have. That's what's meant by a wide moat: Just as a moat surrounding a castle protects it from attack, barriers to entry like the need to establish brands and distribution systems on a massive scale protect the established players from disruptive newcomers.
A business That's Hard to Disrupt
Of course, no moat is invulnerable. PepsiCo has competitors, like Coca-Cola (KO), Dr Pepper Snapple Group (DPS), and to some extent Kraft Foods (KFT), but that's a small number of big players, and PepsiCo's market position in places like the U.S. is large and stable.
It's certainly possible that PepsiCo's position could erode over time. Forty years ago, General Motors (GM) and Ford (F) had what looked like an unassailable position at the top of the U.S. auto market, just as PepsiCo and Coca-Cola do now in the world of soft drinks. But over time, more nimble competitors with better products were able to overcome those moats and establish themselves as major players in their own right. While Ford and GM are still important players, their positions in the market have eroded.
That said, PepsiCo's management has proven to be very astute, and the company has the resources and market strength to adapt quickly if challenged. I think it's a pretty good long-term bet.
The Upshot: A Great Place to Get Started With Stocks
Long story short, here's a company with a business that's easy to understand; strong, steady growth; products that are known and loved around the world; and a solid dividend that can be reinvested to drive additional growth over time.
What's more, the stock fell from over $70 to around $62 during the recent market volatility. Strong earnings mean it's likely to recover, and that means it's a bit of a bargain right now. If you're looking for a good stock to get started with, you could do a lot worse than to grab some shares of PepsiCo.
At the time of publication, Motley Fool contributor John Rosevear owned shares of Ford and General Motors. The Motley Fool owns shares of Ford, Coca-Cola, PepsiCo, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, PepsiCo, General Motors, Ford, and Coca-Cola, as well as creating a diagonal call position in PepsiCo.