If you invest in the stocks of consumer-related companies that you personally admire, you can't go wrong.
Take Krispy Kreme Doughnuts Inc., for example.
Well, maybe not Krispy Kreme, whose stock tanked 66 percent in 2004 and 54 percent in 2005. It has closed nearly 100 stores and just got around to holding its first annual meeting since 2004. Despite evidence of a revival - shares nearly doubled last year - it is a shadow of former sweet expectations.
Or let's say you're a do-it-yourselfer who loves shopping at Home Depot Inc.
Whoops, not a terrific example either, since its stock declined 5 percent in 2005 and 1 percent last year, significantly underperforming the broader market. Its chief executive and chief counsel did OK for themselves, though, departing this year with handy packages worth $210 million and $20 million, respectively.
"If a company produces something that you as a consumer are familiar with and like, it might be a good starting point," said Donald Trott, analyst with Jefferies & Co. in New York. "But you have to go well beyond that starting point to reach an appropriate conclusion."
The investment power of consumer companies with trusted brand names is that they hold up in virtually every type of economy. They are defensive stars because customers continue to patronize them through thick and thin. Generally behemoths in size, they may not fare as well in markets that favor smaller-capitalization stocks, but they won't disappear either.
"If the economy goes into the tank, you're still going to buy aspirin, Band-Aids and Diet Coke, and if you bought Budweiser before a recession you're likely to buy it during and after it as well," said Barry Ritholtz, chief market strategist with Ritholtz Research and Analytics in New York. "The real question is what the value of a particular name brand will be to an investor."
Marketing, distribution channels, inventory control, growth plans and effective handling of capital separate the long-term winners from the also-rans. Not every brand-name company stays around forever, but the surviving giants require little introduction.
For the past several months Ritholtz has owned General Electric Co. because it "looks appealing" and Walt Disney Co. because it "has gotten much better." He also owns stock of Abbott Laboratories and Schering-Plough Corp. Other familiar names that he believes merit close attention include Anheuser-Busch Cos., Philip Morris parent Altria Group Inc., Johnson & Johnson and PepsiCo Inc.
It always makes sense for investors to generally understand the products and services of companies they invest in. But that doesn't mean they should reject complex companies out of hand or embrace every consumer company that strikes their fancy.
"If you can't tell me the polymer and active alkaloid ingredients in the latest products from Sanofi-Aventis, you might decide not to buy any biotech stocks," Ritholtz said. "On the other hand, you could go to a Panera Bread Co. restaurant and say it's really good, but that doesn't necessarily mean you should buy its stock."
Unilever NV, Diageo PLC, Nestle SA, General Mills Inc. and Kimberly-Clark Corp. are powerhouse companies favored by James Cullen, president of Schafer Cullen Capital Management Inc. in New York.
Not familiar with Diageo? Its brands include Guinness, Johnnie Walker and Smirnoff.
"With consumer staples you're looking at large, established companies that are growing their earnings, cutting costs and figuring how to do business in the global marketplace," Cullen said. "They also have pretty good dividends, which you're getting as a bonus."
International opportunities loom large. Although emerging markets may represent only 20 percent to 25 percent of these companies' business, they are growing two to three times faster than the mature markets of the U.S. and Europe, Cullen said. That holds promise for investors.
"Consumer products is a defensive sector that performs well in most markets because it contains what we use every day, such as food, drink and tobacco," said Mathi Vaheesan, a portfolio manager at the $39 million Rydex Consumer Products Fund, a sector fund that holds a basket of consumer products stocks and is not actively managed. "Beyond being a safe-haven sector, however, it has a lot of growth because demand for these products is increasing in a lot of places, and these companies will play a big role in meeting it."
The fund has a one-year return of 19 percent to rank in the top 5 percent of large growth and value funds. Its five-year annualized return of 10 percent puts it in the top 12 percent of that category.
Food products represent 34 percent of assets, beverages 21 percent, household products 16 percent, tobacco 12 percent and food and staples retailing 12 percent. The remainder is in personal products and specialty retailing.
Top stock holdings include Procter & Gamble Co., Coca-Cola Co., Kraft Foods Inc, Colgate-Palmolive Co., Kellogg Co. and Archer Daniels Midland Co.
Companies catering to consumers fulfill the "all-weather" requirements of an individual's portfolio. Just keep in mind that consumers tend to be rather fickle. Trott points out that a lesser-known consumer company sometimes gains enough momentum to eclipse a widely known brand name and can represent the better investment.
Andrew Leckey writes for Tribune Media Services.