ALEXANDRIA, VA (Nov. 23, 1999) -- On Friday, Brian opined that PepsiCo (NYSE: PEP) has the best chance of our finalists to improve its profitability and operating efficiency year over year, and he believes that its stock has more potential to outperform, over our time period, than Coca-Cola (NYSE: KO) or Wrigley (NYSE: WWY).

It's logical then that PepsiCo was Brian's first pick when valuation was part of the equation. Speaking subjectively alone (with nary a thought of valuation), Brian likes Wrigley best followed by Coca-Cola, because both companies have an excellent cash-in, cash-out business. Cash invested in each business results in consistently strong cash returns, meaning that both companies have strong returns on invested capital.

The dilemma for Brian, if one existed, would be which stock to buy: PepsiCo because its valuation and business model leaves potential for strong appreciation, or Wrigley because it is Brian's favorite business model, although its current valuation leaves something to be desired. Brian's brain can't let him ignore valuation, so the dilemma quickly reaches a solution in his investment world. He must account for valuation and that means PepsiCo would likely be his investment if he were to invest in one of the three.

I'm not so sure myself.

Continuing from last Wednesday's column on combining subjective and objective analysis (both play a strong role when investing), I want to first share my subjectively determined favorite from our three finalists. You'll see that I'm being completely subjective.

My favorite of the three is Wrigley and the reasons are all personal opinions. I like its products and I use them, I grew up around Chicago, I know and respect the business. I also believe that gum does more good for a person than harm (it cleans the teeth). On the flipside, looking at our two other finalists, I don't drink soda beverages except on rare occasion, so my attraction to Coca-Cola and PepsiCo is naturally limited (even though I already own Coca-Cola in a moderately active direct investment plan). I also don't believe that soda has any redeeming qualities. Every once in a while, it is refreshing though anything but healthy. In fact, it dehydrates you more than it hydrates you. Anyway, when I drink it, I typically prefer Pepsi over Coca-Cola and 7up over Sprite.

PepsiCo also gets the edge over Coca-Cola in my book because it sells Frito-Lay products. Again, I know that these salty snacks have few redeeming qualities, except that when you really want some, you really want some. And they're tasty! Brian nailed it on the head when he said that these products create high inventory turns for a retailer. Many times the product is consumed before the consumer gets home. (Ahem. Sorry.) Open a bag of chips in the car when you're really hungry, and they're often good as gone. PepsiCo has a highly profitable lock on the high inventory turn snack food market. (Plus, baked Lays are not too unhealthy!)

So, my subjective choices are Wrigley and PepsiCo in that order, because I use these companies' products more often than I use those of Coca-Cola, and because I think gum has more redeeming qualities than soda or chips. These are all, clearly, purely objective reasons to like one company's stock over another. You will have your own preferences, of course.

Brian wrote on Friday that valuation plays the largest role in the end when he invests. He must feel that he's getting a good value for his dollar. I agree with that premise, but I won't say that valuation will play the largest role in my Drip Port decisions or my personal direct investing decisions all the time.

We've always longed for "good value" investments in Drip Port, but I've also suggested that valuation isn't as important as it might otherwise be because we're not buying stock in a lump sum (Coca-Cola at $80 for example). Instead, we're dollar-cost-averaging, meaning that we'll have a cost basis that favors the lower end of a stock's multiyear price range if we invest consistently. Valuation still plays a large role, however, always hovering in the background and eventually floating closer to front and center. It played a key role in choosing Intel (Nasdaq: INTC) as our first investment, Johnson & Johnson (NYSE: JNJ) over Pfizer (NYSE: PFE), Campbell Soup (NYSE: CPB) over others, and Mellon Bank (NYSE: MEL) over the pack of investments that Dale Wettlaufer considered. Valuation isn't always the final determinant, however.

Again, there is a good mix -- a good balance. I like to buy my favorite company (determined both subjectively and objectively) when at a reasonable to moderate valuation. If my favorite company is priced too high, I'll likely hold off. But if it's just priced with the market (typically that means at a premium to the market) and not outrageously high, even if it is moderately high, I'll likely begin to invest assuming it's my favorite company and that I'm dollar-cost averaging.

So, where does this leave us on our food and beverage finalists? Wrigley is my favorite company subjectively. PepsiCo is my second favorite for many of the same reasons Brian mentioned. It has the potential to improve its operating results and valuation multiple. Also, I like its products and love its vice-grip on snack foods. Coca-Cola is third. It is arguably still priced richly and Wrigley's cash in, cash out dynamics compete with those of Coca-Cola but at a lesser price. Brian's favorite is Wrigley when valuation doesn't matter, but it does, and therefore PepsiCo is his favorite for potential outperformance.

It appears to boil down to PepsiCo versus Wrigley for both of us. My subjective opinion is just the first part of my analysis, though. Next comes objective analysis, which typically (and perhaps always) sways me strongest when deciding between companies that I respect. To discuss this column and topic, let's meet on the Drip Companies message board. I know that many of us love Coca-Cola, and we will keep looking at it, too. Maybe it can sway us. It will be difficult given its price and its hearty competition in lower-priced Wrigley and PepsiCo.

Related Links:
Brian's recent post on PepsiCo vs. Coke
Today's Fribble on Drip Investing
Drip Basics board
Drip Companies board
Last Wednesday's Drip column on Subjective/Objective
Last Friday's column: Brian's Food and Beverage Pick