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Rising Star Buy: Coca-Cola

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After narrowing the field, it's time for the first buy for our Rising Stars "multivitamin" portfolio. If you can pretend for a moment you didn't read the headline, I'll masterfully build the suspense for you. For background on exactly what type of company we're seeking for the first buy, it might help to read last week's article.

Beyond the numbers
When last we talked, Microsoft (Nasdaq: MSFT  ) easily had the best numbers of the bunch. Not only did it have the best margins and returns on investment, it also carried the best valuation. But now it's time to open the hood and look at the nuts and bolts of our candidates' business models and competitive positions.

Actually, we can be fairly confident in the soundness of any of these business models. Like the final contestants of a beauty pageant, our screening process ensured we were only left with the most talented companies (OK, bad example). Microsoft, Coca-Cola (NYSE: KO  ) , PepsiCo, Procter & Gamble (NYSE: PG  ) , McDonald's (NYSE: MCD  ) , Abbott Labs (NYSE: ABT  ) , and 3M (NYSE: MMM  ) are all rock-solid financially and have a strong history of earnings and dividend growth. All have very attractive -- if not outstanding -- net and free cash flow margins. And they've all been around a long time -- four of them were founded in the 1800s!

One other major consideration: It's easy to understand all of these businesses. There are no financial firms here with arcane inner workings where even the CEOs aren't quite sure what they have. We can conclude our candidates are all well-managed and have no major flaws in how they run their businesses.

Of moats and men
Competitive positions can change over time, however, which brings us to my biggest concern with Microsoft. Its moat is under assault from all directions from the sharpest of competitors. From Google in search and productivity apps to Apple in computers, OS software, and mobile, there is no relief. This is the main reason the stock is priced so low -- Mr. Market is telling us it's not quite sure what's going to happen over the next three to five years, much less the next three to five decades.

I like Microsoft. Heck, I own shares of Microsoft and think many of these concerns are overblown. I struggled with this buy decision for days. However, my goal for this first purchase is to deliver a corporate El Dorado that has a good shot of anchoring our port for years to come. In his exhaustive research of these top-performing companies, Jeremy Siegel says "investors should be willing to pay 20 to 30 time earnings" for such El Dorados. Also, no tech firm made his list. And so Microsoft, while I think it shows good short-term potential, carries too much risk for our purposes and isn't yet at that "set and forget" level. This portfolio will be buying all kinds of stocks in the weeks to come, and Mr. Softy may well fit into another mold -- but today we're passing.

It's the real thing
Using the criteria I've set forth, I think the most attractive buy right now is Coca-Cola. Not only does it carry every single corporate El Dorado characteristic, it already is one -- and was the sixth-best performing S&P 500 firm in Siegel's 1957 to 2003 study period.

This sweet business of selling flavored sugar water at high margins ... well, it's a sustainably great business model. People everywhere love Coke, and it's one of the top brands in the world. It's the kind of brand that builds the moat that keeps thirsty consumers coming back time and again, paying a premium to have a Coke and a smile.

Besides Coke products, the company also has such famous brands as Fanta, Sprite, Fresca, Powerade, Minute Maid, and Dasani. The business consists mostly of selling concentrates and syrups to independent bottlers (including Coca-Cola Enterprises (NYSE: CCE  ) , which is nearly 50% owned by Coca-Cola), which then produce the finished beverages, package them up, and sell them to distributors. Nearly three-quarters of Coca-Cola's revenue comes from overseas.

One of the company's self-identified core capabilities is consumer marketing, "designed to enhance consumer awareness of and increase consumer preference for our brands." Advertising expenses came to about $2.8 billion in 2009, but that's money well spent. The strong brand that this marketing has carefully crafted over the decades raked in more than $7 billion in free cash flow in the past 12 months alone. That cash flow is powering a dividend that has increased an incredible 48 years in a row.

Let's drink
I'm happy to make Coca-Cola the first purchase in the multivitamin portfolio. With $17,000 to invest over the first year, I'm initially setting $1,000 as a "full position." To start, then, I'm buying a half position -- or $500 worth. I think a half position is never a bad idea, especially for beginning or intermediate investors. Buying just half allows you to watch the company and learn, and then to allocate more to the position when conditions warrant. My buy order goes in tomorrow with -- and this is very important -- instructions to reinvest all dividends.

Remember, you can get more details on the portfolio and contribute your opinion by visiting our discussion board. See you there!

Fool analyst Rex Moore is now available in living color. He owns shares of Microsoft and Procter & Gamble. Google, Coca-Cola, 3M, and Microsoft are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor recommendation. Coca-Cola, PepsiCo, and Procter & Gamble are Motley Fool Income Investor selections. The Fool owns shares of and has written covered calls on Procter & Gamble. Motley Fool Options has recommended a diagonal call position on Microsoft. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Apple, Coca-Cola, Google, and Microsoft. 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.

Read/Post Comments (8) | Recommend This Article (49)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2010, at 6:04 PM, goalie37 wrote:

    I am long KO as well, but the valuation is a bit high right now. I know you need a pick for your article and can't wait an indefinite amount of time for the stock to come down, but valuation should have been looked at in the piece.

  • Report this Comment On November 29, 2010, at 6:28 PM, Bonefish100 wrote:

    It seems that you're lately recommending stocks that are at the peak of a run-up (i.e., KO for example). What gives?

  • Report this Comment On November 29, 2010, at 7:21 PM, baldheadeddork wrote:

    Grrrrrr. Investment analysts have been saying the same cr@p about Microsoft for years - even while MSFT's revenues and earnings have continued to grow at a phenomenal clip.

    Microsoft has never been a player in search. Bing is their challenge to Google's moat, and it's a pretty good effort. Since Yahoo is now running Bing it has a 26% market share in the US (10% globally) and Microsoft is getting 12% of Yahoo's search revenues. It's not profitable yet, but that much market share at this stage make Bing the strongest competitor Google has faced since it knocked off Yahoo several years ago.

    Apple's rise in computer (not mobile device) sales is mostly the stuff of PR myth. Mac OS-X has a 5% market share globally, which is about where its been forever. The modest increase that did happen can be tied to Apple's switch to Intel x86 hardware, which allowed Mac users to run Windows software. Which requires a valid license of Windows, and any other Microsoft software you want to run on your Mac.

    I've scratched my head for years over why the market has treated MSFT like the proverbial red-headed stepchild. Maybe the market can only accept one successful tech company in a sector at a time - if Apple is doing great it means that Microsoft must be a sucking chest wound of a company. Whatever the reason, MSFT's valuation and oceanic moats in operating systems and productivity suites are making it the most compelling stock I've seen since Ford was priced under $5 a share.

  • Report this Comment On November 30, 2010, at 1:14 AM, TheDumbMoney wrote:

    I agree with other comments. I own the stock, have for some time. But I think after a 20% gain in the last four months, and at near a 2 1/2 year high, with a PEG ratio of 1.6, a yield only a bit above average, with both trailing and forward looking P/Es that are higher than that of the S&P, with a P/S ratio that is more than double Pepsi's, for example, and a pretty high EV/FCF ratio, I'm not convinced now is the best time to be loading up on Coke. Just seems like a lot to pay for a company that has averaged sub-8% EPS growth over the last five years. FCF growth has been better, especially if you look a ten year period, but not by much. But I could be wrong, as I often am. That said the point of the article is to pick a theoretical long-term investment. Since the premise is you are going to buy a company that will be around in fifty years, and hold it, I think KO is a stupendous pick. I would certainly pick it from the picks here, because as you rightly point out, it faces I think the least competitive risk. Personally though, I don't expect a lot of share price appreciation in the next couple of years, at least, as I think it's exalted status is well-reflected in the stock. Keep in mind my CAPS score is in the low twenties though. Mainly I just like to hear myself talk.

  • Report this Comment On November 30, 2010, at 1:40 PM, langco1 wrote:

    ko rose 20 years ago! this company is fully grown with far more competition than ever.. coke is going no where ....

  • Report this Comment On November 30, 2010, at 5:10 PM, Radiance08 wrote:

    I'm long Ko as well and bought it awhile back for the same reasons..

    long term reliable, good dividends and be sure to reinvest.

  • Report this Comment On December 04, 2010, at 10:12 PM, gladnfoolish wrote:

    KO and PEP are both longtime long postions for me. Rex is on point with KO; 120+ years of selling carbonated sugar water for massive profits is worth a look and a buy consideration.

  • Report this Comment On December 05, 2010, at 1:25 PM, MattSEMO08 wrote:

    Doesn't every mcd have KO products. It just make sense to buy KO and buy mcd. If an ave customer goes to mcd at least 5 times month and they get a carbonated beverage it is going to be KO product. And if they go to grocery store and buy soda. I'm willing to bet they are going to buy a KO vs. Pepsi or dr. Pepper. I'm long on KO and MCD and I love there dividends.

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