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7 Companies With Great Stocks AND Great Businesses

The two go together like peanut butter and jelly

By Will Ashworth, InvestorPlace Contributor

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tax-free high yield

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Who doesn’t want to own great stocks that are also great businesses?

That’s an obvious answer but an article that appeared in Barron’s April 13 (subscription required) suggests passive investing and modern portfolio theory has led to investors simply buying an index blissfully unaware of the companies held by the portfolio.

Like Warren Buffett, Barron’s contributor Steven Bleiberg feels investors are better served by understanding they are investing in real businesses despite owning a passive mutual fund or ETF to do so.

“Ultimately, equity investors are buying into actual businesses and would be better served by seeking to understand them,” Bleiberg asserts. “Thinking about stocks this way — as real businesses, rather than aggregates of return and volatility statistics — is something many investors have lost sight of since the rise of [Modern Portfolio Theory].”

While you can argue with Bleiberg’s logic, the reality is most people don’t have the level of interest necessary to do even the most basic research.

If you’re one of these people, here are seven great stocks that are also great businesses.

To qualify as great, a business must possess two things: a return on invested capital of 20% or more in each of the last three fiscal years; and, one of Fortune’s 2018 list of the World’s Most Admired Companies.   

Companies With Great Stocks AND Great Businesses: 

Starbucks Stock Bulls Ignoring China Risks
Source: Shutterstock

Starbucks (SBUX)

Return on Invested Capital: 32.3%

Position on Fortune’s List: 5th

Anyone who’s read the news the past week is keenly aware of the trouble Starbucks Corporation (NASDAQ:SBUX) is currently facing over the forcible removal and arrest by police in a Philadelphia Starbucks.

The way Starbucks has gotten out in front of this PR disaster will be studied at business schools across the country. Very few companies, including most of the names on Fortune’s list, would handle such a difficult situation with so much clarity and sincere regret.

I’m always amazed at how Starbucks views the world compared to most companies in America. It’s in a class of its own. Even Warren Buffett, who’s held out as a beacon of morality and ethics, could learn a thing or two from the people in Seattle.

“What Howard Schultz, but especially what CEO Kevin Johnson [have] done here has been remarkable. It is the anti-Mark Zuckerberg, the anti-Sheryl Sandberg,” Yale senior associate dean Jeffrey Sonnenfeld told CNBC. “They truly did lean in. Instead of writing about leaning in, they actually did it.”

I couldn’t agree more.

As far as I’m concerned, Starbucks is both a great stock and a great business. Maybe the greatest.

Companies With Great Stocks AND Great Businesses: 

Southwest Airlines (LUV)

Return on Invested Capital: 23.3%

Position on Fortune’s List: 8

Not only is Southwest Airlines Co (NYSE:LUV) a great stock and a great business, it sure knows how to hire good pilots.

The safe emergency landing by veteran Southwest pilot Capt. Tammie Jo Shults of Boeing 737 Flight 1380 from New York to Dallas is a testament to both Shults for her talent flying a plane while under extreme stress and the company for recognizing that talent back in 1993 when she was hired after leaving the Navy.

Great businesses sweat the details. The skills demonstrated by Shults speaks volumes of the preparation Southwest takes so that all of its pilots are able to do perform their duties in exemplary fashion.

You can invest in some of the other big airlines but I’m confident your best bet is Southwest. It’s no coincidence that Southwest is Berkshire Hathaway Inc.’s (NYSE:BRK.A, NYSE:BRK.B) biggest holding of the company’s four airline stocks.

Companies With Great Stocks AND Great Businesses: 

Nike (NKE)

Return on Invested Capital: 26.5%

Position on Fortune’s List: 16

It’s interesting that shortly after former Lululemon Athletica inc. (NASDAQ:LULU) CEO Laurent Potdevin departed the athleisure apparel retailer in early February because of misconduct, the same problems reared there ugly head at Nike Inc (NYSE:NKE).

An internal employee-led survey by female employees resulted in CEO Mark Parker undertaking a formal six-month review of the company’s culture that led to the departure of several high-ranking executives.

Parker, who was scheduled to retire by 2020, will now stay on indefinitely to fix what ails its company culture.

Fortunately, for Nike shareholders, Parker’s acted with equal speed in extricating itself from the PR mess this misconduct has shined on the company.

Great businesses act swiftly, decisively, and in the best interests of all stakeholders. Careers might be ended — Nike brand president Trevor Edwards is retiring in August; he was long thought to be Parker’s successor — but that’s the price you must pay to retain customer trust.

Interestingly, here’s what I said about Nike last June:

“Adidas might be winning the skirmishes taking place in the here and now. Long term, however, I see Nike’s culture winning out. It’s not going to be easy, but if there’s anything I’ve learned from reading Phil Knight’s book, the people in Beaverton are a resilient bunch.”

They sure better be.

Companies With Great Stocks AND Great Businesses: 

3M (MMM)

Return on Invested Capital: 22.5%

Position on Fortune’s List: 21

Is 3M Co (NYSE:MMM) the best industrial conglomerate now that General Electric Company (NYSE:GE) has imploded into a shadow of its former self?

Yes.

In 2016, I called MMM one of the 10 Top Stocks Every Retirement Portfolio Should Have; nothing’s changed almost two years later.

Well, nothing except the fact MMM stock is up 33%, not including dividends. That’s pretty good for a company that operates such a disparate group of companies.

My colleague James Brumley recently called MMM one of the 10 Best Stocks to Buy and Hold Forever. I can’t disagree.

“It’s a wild mix that seems to work for 3M though, giving the company something to sell regardless of the economic environment. The clincher: 3M has managed to pay — and increase — its dividend every year going all the way back to 1977.”

It’s hard to argue with success.

Companies With Great Stocks AND Great Businesses: 

Home Depot (HD)

Return on Invested Capital: 30.4%

Position on Fortune’s List: 22

Possibly no company has benefited more from the U.S. economic recovery since 2008 than Home Depot Inc. (NYSE:HD). Home values in many U.S. cities (not all) have risen to levels equal to or exceeding where they were prior to the recession creating a wide swath of eager renovators.

Ka-ching!

Unfortunately, HD stock has come under fire in 2018. The stock is down 5% year to date through April 18, its first year in negative territory since 2008. That’s right. HD is working on a tenth consecutive year generating a positive return for shareholders.

Whether you think its best days are behind it, there are very few S&P 500 companies that have matched Home Depot’s consistent performance over the past decade.

However, to grow stock prices the way Home Depot does, you have to grow earnings.

“Home Depot has beat on earnings and revenue estimates for six straight quarters. Last quarter, comparable-store sales came in at 7.5% vs. expectations of 6.5%,” wrote InvestorPlace’s Bret Kenwell April 17. “It’s obvious that, like Costco Wholesale Corporation (NASDAQ:COST), Home Depot has a business model that isn’t necessarily invincible to Amazon, but does a heck of a job insulating against it.”

Great businesses play to their strengths.

Companies With Great Stocks AND Great Businesses: 

Boeing stock
Source: Wikimedia

Boeing (BA)

Return on Invested Capital: 49.7%

Position on Fortune’s List: 25

Despite the Southwest emergency landing mentioned earlier, Americans are actually flying more than they ever have and that’s creating a need for more aircraft.

Currently, there are approximately 23,500 commercial aircraft operating globally; Boeing Co (NYSE:BA) expects the world will need at least 41,000 new aircraft over the next 20 years to match the demand.

That’s great news if you’re a BA shareholder.

Recently, I provided some reasons why I thought Boeing stock would continue to fly higher. Chief among them was the fact it generated $11.5 billion in free cash flow in 2017, a company record.

The fact is, when Boeing’s not getting itself tangled up in unnecessary political fights like the one it recently dropped with Bombardier, Inc. (OTCMKTS:BDRBF) over the Canadian company’s CSeries jets, it actually runs a darn good business.

That’s not easy to do when you’re building planes that sell for more than $400 million a pop.

Companies With Great Stocks AND Great Businesses: 

Source: Shutterstock

UPS (UPS)

Return on Invested Capital: 27.1%

Position on Fortune’s List: 33

Although I tend to lean toward FedEx Corporation (NYSE:FDX) when it comes to an apples-to-apples comparison with its arch-rival United Parcel Service, Inc. (NYSE:UPS), there is no question UPS does a good job delivering above-average returns on invested capital.

UPS, like FedEx, lives in an e-commerce world controlled by Amazon.com, Inc. (NASDAQ:AMZN). With Amazon generating 44 cents of every dollar in U.S. online revenue in 2017, the concern at the world’s two largest shippers is that Amazon vertically integrates its e-commerce business including providing an end-to-end shipping solution.

I just don’t think that’s feasible or sensible given Amazon’s real business is selling 100 million Prime members as many things as possible.

More importantly, as my colleague Josh Enomoto noted recently, the other 56% of online sales have to be delivered by somebody; it might as well be UPS.

The company made $7.3 billion in discretionary contributions to its three primary U.S. pension plans in 2017, more than double the contributions in the two previous years.

Back that out and it would have had close to $6 billion in operating cash flow despite spending $5.2 billion in capital expenditures over the past year or an amazing 7.9% of revenue.

Great businesses invest in themselves. Kudos to UPS for understanding this.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/7-companies-with-great-stocks-and-great-businesses/.

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