Build Your Portfolio by Buying What You Know

Oftentimes, when searching for great stocks, we need to look no further than our own common knowledge. The products and services we use on a daily basis can provide inspiration for making an investing hypothesis. In fact, investing greats like Peter Lynch and Warren Buffett have made tons of money in the market by buying what they know. Here's how you can get started.

Begin with what you know
Regardless of whether you're an investor seeking growth or are interested in income, look for a great company with a sustainable business model and solid growth prospects. When researching companies, a good place to start is Yahoo! Finance. Another invaluable resource is the SEC's EDGAR system database. There you can find company filings, which contain information to help you evaluate a company.

Warning: Sifting through 100-page company filings can be daunting and may require a caffeinated beverage. So, I threw back a shot of espresso and did some of the dirty work for you. Here's what I found.


For growth investors...
Walk down any city street and take note of the people proudly toting Coach bags and sporting Michael Kors sunglasses while ducking into the corner Panera to grab a coffee and pastry. Not only are these companies' products trendy (and delicious, in the case of Panera), but all three companies also boast solid business models and have the numbers to back them up.

During the past five years, Panera has grown revenues by 15% annually. Same-store sales were up 5.1% last quarter over the same period last year. Not only can Panera make money, but it also knows how to utilize it, as evidenced by the company's strong cash flow generation and high returns on capital. With nearly $300 million in cash and no debt, Panera boasts a very palatable balance sheet. And Panera's unwavering focus on quality and solid management bodes well for continued success.

Coach recently posted spectacular sales growth in China, enjoying the exploding luxury goods market in Asia. The company projects its store square footage in China will increase 35% by its fiscal year-end 2013. But the luxury handbag and accessories maker suffered weakening North American sales.  

Meanwhile, Michael Kors' North American same-store sales were up more than 40% in the last quarter. Gross margins also increased year over year, aided by its high-margin licensing business. Even better, it appears that Kors continues to steal market share from competitors.  Disappointingly, insiders recently sold off big chunks of stock. But it doesn't signal the apocalypse. Kors remains an aspirational brand with wildly sought-after products.

...Or for dividend investors
No stranger to leveraging its own lucrative licenses and trademarks, toy maker Hasbro personifies a sustainable business. At one point or another, it's likely that you, your children, or grandchildren have played with Mr. Potato Head, Transformers, or My Little Ponies. And paying nearly a 4% dividend, Hasbro is a solid income investment that boasts a history of payout ratio increases and plenty of room to boost its dividend for years. 

Eventually, those same My Little Ponies get passed down to future generations, given away, or simply thrown out. That's where Waste Management comes in. North America's largest trash company boasts a huge competitive advantage due to the regulatory hurdles involved in opening new landfills. The company recently posted a very slight uptick in revenue growth, but that's expected to pick up as construction volumes improve. While you wait for the recovery, you can collect a tidy 4% dividend.

Foolish bottom line
Of course, familiarly with a company's goods and services doesn't solely warrant its stock being a good investment. Don't blindly let your approval of a company's products drive investing decisions. Pay attention to any red flags -- like a pattern of declining sales or eroding margins -- when conducting your research.

Based on my own legwork, I'm most excited about Waste Management. It boasts a strong economic moat, and I like its future growth prospects. But don't take my word for it. Do your research, and start building your portfolio with one of these stocks today.

Waste Management has been a longtime favorite for dividend seekers everywhere, but the share price performance over the last few years has left many investors wanting. If you're wondering whether this dividend dynamo is a buy today, you should read our premium analyst report on the company today. Just click here now for access.

The article Build Your Portfolio by Buying What You Know originally appeared on Fool.com.

Fool contributor Nicole Seghetti has no position in any stocks mentioned. You can follow her on Twitter @NicoleSeghetti. The Motley Fool recommends Coach, Hasbro, Panera Bread, and Waste Management. The Motley Fool owns shares of Coach, Hasbro, Panera Bread, and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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