I saw a recent article from Quartz at Work about Reebok, other brand reboots, and what Authentic Brands plans to do to revitalize the once-dominant sneaker company. While the rise and fall of Reebok is a fascinating story, the article got me thinking about stocks to buy for the “Brands” portfolio.
After all, Authentic Brands itself has filed to go public. My fellow InvestorPlace contributor Dana Blankenhorn calls it the most fascinating IPO of the year.
“Authentic’s S-1 has more pictures than Pinterest (NYSE:PINS), but tells little about the business. The numbers are for 2020, before a host of recent deals. It only identifies direct licensing revenue, $488 million of it in that year. But $211 million of that money, 43%, wound up as net income. This is said to justify a $10 billion enterprise valuation,” Dana wrote on Sep. 20.
I agree with my colleague. It’s definitely up there. Heck, by the time I’ve written this, the company’s stock might be eligible for my newest portfolio.
But, for now, Finviz.com tells me there are 34 public companies with the word “Brands” as part of their corporate name. So, I’ll recommend the seven best stocks to buy from the bunch.
- Restaurant Brands International (NYSE:QSR)
- Constellation Brands (NYSE:STZ)
- Fortune Brands Home & Security (NYSE:FBHS)
- Newell Brands (NASDAQ:NWL)
- Acuity Brands (NYSE:AYI)
- Cornerstone Building Brands (NYSE:CNR)
- BellRing Brands (NYSE:BRBR)
Stocks to Buy: Restaurant Brands International (QSR)
I begrudgingly put Restaurant Brands International, the owner of Tim Hortons, Burger King and Popeye’s, on my list of stocks to buy.
Burger King acquired Tim Hortons in 2014 to form RBI. Ever since, I’ve had a hard time accepting the merger, given Burger King’s CEO made each Tim Horton’s head office employee justify their jobs in 15-minute interviews.
To date, I’d say I was right to be concerned about the poor treatment of employees. Over the past five years through Sept. 22, QSR stock has a total return of 9.0%, less than the Canadian market on the whole and nearly half the return of the entire U.S. market.
In August, Tim Hortons China, a joint-venture between RBI and Hong Kong private equity firm Cartesian Capital, agreed to merge with Silver Crest Acquisition Corp. (NASDAQ:SLCR) in a transaction that valued the Chinese segment of Tim Hortons at $1.7 billion.
As long as 3G Capital continues to own almost 30% of RBI stock, I’ll remain cautious in my praise.
However, with $1.35 billion in trailing 12-month (TTM) free cash flow (FCF) and a 7.0% FCF yield, now could be an opportune time to pick up some shares.
Constellation Brands (STZ)
A telltale sign Constellation Brands has become a big deal in corporate America is the recent announcement that it would move 400 of its employees from its offices in Canandaigua, New York, to downtown Rochester.
“The company investment is estimated at $50 million, while Landers [Peter Landers, majority investor in group that owns the downtown property] says the owners/developers’ will spend close to $35 million on historic restoration, stripping paint from the barrel ceilings and brick walls, and building a 120-space parking structure,” The Democrat & Chronicle reported.
While Constellation is known for Corona and Modelo beer, Svedka vodka, and Woodbridge wine, amongst others, it is the company’s investment in Canopy Growth (NASDAQ:CGC) that gets most of the attention.
That’s because it’s taking forever to see the benefits of its multi-billion-dollar investment in the Canadian cannabis company. Since it acquired 9.9% in October 2017, STZ stock has gone sideways over nearly 48 months.
As a glass-half-full kind of person, I see the potential upside of its Canopy investment as a big reason to buy at current prices.
Constellation has a TTM FCF of $2.0 billion, good for an FCF yield of 4.9%. When you consider the value yet to be extracted by its investment, STZ’s valuation is more than reasonable.
Stocks to Buy: Fortune Brands Home & Security (FBHS)
Fortune Brands Home & Security was spun off from Fortune Brands Inc, part of the then-holding company’s plan to deliver additional value for its shareholders almost a decade ago.
At the same time, it sold its Acushnet business for $1.225 billion and renamed Fortune Brands as Beam Inc., the holding company’s spirits business. Beam was subsequently sold to Suntory Holdings in 2014 for $16 billion, including the assumption of debt.
Fortune shareholders got one share of FBHS for each share in the parent. FBHS stock has generated a total return of 22.4% over the past decade, 548 basis points higher than the entire U.S. market.
The company has three operating segments: Plumbing, Outdoors & Security, and Cabinets. Its brands include Moen faucets, Larson doors, Master Lock locks, MasterBrand cabinets, and many more.
Together, they have TTM sales of $7.02 billion, $1.03 billion in operating income, $650 million in FCF, and an FCF yield of 5.0%.
It’s a great business to own for the long haul.
Newell Brands (NWL)
Newell CEO Ravi Saligram was recently named one of Atlanta’s best CEOs by the Atlanta Business Chronicle. Saligram joined Newell as CEO in October 2019. Before that, he was CEO of Ritchie Bros. Auctioneers (NYSE:RBA) from July 2014 to July 2019 and OfficeMax from November 2010 to November 2013. In addition, he oversaw the merger between OfficeMax and Office Depot.
He’s been an executive for many years working in several different industries. Since joining Newell, NWL stock has gained 32% over nearly 24 months. That compares to 50% for the S&P 500 index over the same period.
Over the years, Newell Brands became quite bloated, with too many businesses generating too few profits. Newell might have underperformed so far in Saligram’s tenure, but he’s doing his best to set the company up for sustainable growth.
“Along our journey, we will add capabilities to build competitive advantage. For example, we are building on our eCommerce capabilities and Digital First mindset (over 21% of our global sales are sold online) to become truly omni channel,” Saligram told the Atlanta Business Chronicle.
“We are creating consistent and compelling brand experiences for consumers no matter where they shop, how they shop or when they shop be it buy online, deliver to home, buy online pick up at the store, buy online pick up at curbside or shop at a store.”
In 2019, Newell had an FCF of $780 million. In the TTM, it was $1.1 billion, a 41% increase. I would expect this FCF growth to continue.
The performance in the next 24 months ought to be much better than the last 24.
Stocks to Buy: Acuity Brands (AYI)
It’s great to see the provider of commercial and residential lighting solutions doing well in the markets after a long stretch of less-than-stellar Acuity Brands shareholder returns.
For example, if you invested $10,000 in AYI stock in September 2020, today, you would have approximately $17,294. However, if you invested the same $10,000 in its stock three years ago, you’d have $10,609.
While the company got lost in the woods for a time, it’s been able to find its way back, thanks in part to its hiring of CEO Neil Ashe in January 2020. Ashe has held some high-powered jobs, including being in charge of Walmart’s (NYSE:WMT) eCommerce & Technology unit from 2012 through 2016.
Ashe replaced Vernon Nagel, who served as Acuity’s CEO for 16 years. Nagel moved into the executive chairman role. They ought to make an excellent pairing.
In the company’s Q3 2021 results, Acuity had a 16% increase in sales to $899.7 million, with a 56% increase in earnings to $2.37 a share. In 2021, it expects growth to continue.
In January 2019, I suggested that Acuity needed a new CEO who could bring a fresh perspective. Less than a year later, it did just that. Kudos to Nagel for recognizing it was time to move aside.
Cornerstone Building Brands (CNR)
Of all the names on this list, Cornerstone Building Brands is the only one I didn’t recognize.
The North Carolina-based provider of commercial, residential, and repair & remodel building products is the largest manufacturer of exterior building products in North America.
Although the Cornerstone name only came into existence in November 2018 after the merger between NCI Building Systems and Ply Gem Parent LLC, the two companies have a history of more than 75 years.
Since the merger’s completion, CNR stock has experienced its fair share of highs and lows, falling to less than $3 in the March 2020 correction, then recovering to almost $20 in June before settling back into the mid-teens in late September.
A prominent owner of Cornerstone stock is BlueTower Asset Management, a Texas-based portfolio manager. The company’s Global Value Strategy owns 17 stocks, CNR being the largest weighting at 18.6% of the portfolio.
Here’s what BlueTower had to say about Cornerstone in its Q2 2021 shareholder letter:
“As the company realizes acquisition synergies, the housing boom continues, and Cornerstone pays down debt, the company’s value will become apparent to investors and share price will rise to meet its true fundamental value,” BlueTower portfolio manager Andrew Oskoui wrote.
“Investors who were previously repelled by the high debt levels will invest at lower leverage levels. The share price has already tripled from the average price our long-term investors in the strategy composite paid, but we still believe the company has a high expected forward rate of return.”
What’s not to like?
Stocks to Buy: BellRing Brands (BRBR)
If you’ve ever eaten a PowerBar, you’ve heard of and supported BellRing Brands.
In October 2019, Post Holdings (NYSE:POST) spun off its former active nutrition business — PowerBar, Premier Protein, and Dymatize brands — selling 39.43 million shares at $14 per share. It raised approximately $516.4 million from the IPO. It used the proceeds to pay down some debt owed to the parent and buy shares of the operating company, BellRing Brands LLC.
After the IPO, Post owned 71% of BRBR stock. In August 2021, Post announced that it plans to distribute most of this stake to shareholders. The move’s expected to include a special cash dividend for Post shareholders.
At the same time, it announced the distribution; it also announced Q3 2021 results. Sales in the quarter jumped 68% over last year to $342.6 million, while its operating profit increased by 68% to $51.5 million.
BellRing’s TTM FCF is $214.3 million. Based on a market cap of $1.3 billion, it has an FCF yield of 16.5%, well into value territory.
If I’m a Post shareholder, I’d be hanging on to my BellRing shares for the long haul.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.