3 Stocks Investors Have Loved in 2012
Jun 24th 2012 10:07PM
Updated Jun 24th 2012 10:12PM
So far, 2012 has been one of those years they talk about in horrifically boring and incredibly important textbooks. The Dow Jones Industrials Average has been up and down, like a busy elevator. Stocks have been fantastically overpriced at times, and at others there have been great deals for investors. But a few stocks have risen above the noise and had a great year. What's driving the growth, and is it still a good time to get on board with these rockets?
Three of the highest flyers have been busy feeding Americans. As it turns out, even when we don't have a lot of cash, we're happy to eat. Grocery chain Whole Foods (NAS: WFM) along with restaurant chains Starbucks (NAS: SBUX) and Chipotle (NYS: CMG) are all up more than 20% in 2012. This is a great result in any year, but compared with the Dow's meager 3% rise, we're looking at world-class outperformance.
The keys to success
Whole Foods continues to impress investors with its high margins. In Q1 this year, the company held on to 4% of its revenue as profit. That's not bad, especially in light of competitors' margins. Safeway (NYS: SWY) managed to keep only 0.7% of revenue last quarter.
Investors also like Whole Foods' commitment to being good. The company continues to live on the bleeding edge of the making-corporations-seem-green movement, and that's why it can get away with such high margins in a price-driven game. Whole Foods has broken out of the usual constraint placed on grocery stores -- price -- and made up its own rules.
Chipotle has taken a similarly green path but has compounded its returns by being a growth machine. Last year, revenue increased 20% to $2.3 billion. Since the end of 2008, the company has added almost 250 stores, and with a new Asian concept being tested, it looks as if the company is just going to keep growing.
Starbucks has been running with its comeback story for the past few years. Its 20% growth in share price this year has come from a combination of announcements and results. The company posted a 10% net-income ratio in the first quarter of 2012, which was in line with its historical earnings. It has also made two interesting headlines in the past few months.
First, in March, the company announced that it would begin producing its own line of single-serve machines to compete with Green Mountain Coffee Roasters (NAS: GMCR) , whose woes may also be exacerbated by Safeway's choice to sell private-label K-Cups at its stores. Then, earlier this month, it acquired a bakery to increase its product mix. With its long history of growth, all of these signs seem to indicate a strong year to come for Starbucks.
The price catch
None of these stocks is cheap in the traditional value-investor sense. The lowest trailing P/E comes from Starbucks, and it's at 32. But these companies have always had a premium tacked onto their stock price. So far, the growth the three have displayed more than justifies the price.
The risks and recommendation
While all three of these companies play in a similar space, I like the outlook for all of them. They have proved to be recession-resistant, and now that we're on the long, slow road to economic growth, I think all three will continue to do well.
The biggest risk is that other companies catch up. This is less of a risk for Starbucks and more for Chipotle and Whole Foods. While those companies have developed an ethos and a following, I think there isn't as much of an economic moat as there is around Starbucks. Whole Foods' market share could be damaged by another grocery chain with deep pockets and an ambitious strategy to go organic. Chipotle's model is even more tenuous, as it's still in a relatively young phase of its life.
That said, these three stocks do seem like safe bets to me. But if you're looking for more, check out the Fool's free report on our top stock pick of 2012. Our analysts spent hours poring over reports and came up with the one stock to own this year. Get your copy of this excellent report now.
The article 3 Stocks Investors Have Loved in 2012 originally appeared on Fool.com.Fool contributor Andrew Marder owns none of the stocks mentioned in this article. The Motley Fool owns shares of Starbucks, Chipotle Mexican Grill, and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Starbucks, Chipotle Mexican Grill, and Whole Foods Market. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.