On this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by Jason Moser as he breaks down what he looks for in a "never-sell" stock. Next attribute on the agenda: a corporate strategy that gives it pricing power, staying power, and room to grow. Think Starbucks (NASDAQ: SBUX), for example.A full transcript follows the video.
This video was recorded on August 2, 2016.
Alison Southwick: Let's talk about strategy next. Maybe they don't have a great strategy, but they're like the right business at the right time. Or maybe they do have a good strategy. I don't know. How do you judge strategy?
Jason Moser: You talk about the right business at the right time. This recent Pokemon Go thing. Everybody's been wondering [whether] Nintendo is the next big thing. Well, Nintendo's been a public company for a while, now, and not a very compelling investment. It just goes to show that one little flash in the pan isn't necessarily going to change the game for a company like that.
Moser: But I think with strategy we look for companies with pricing power.
Southwick: What is pricing power?
Moser: Pricing power is the ability to raise prices on your product or service without realizing any drop-off in traffic. Starbucks, I think, is the shining example of a company that sells an addictive product (coffee), and addictive in the sense that people don't really think about it being addictive. It's not like cigarettes. Cigarettes we know are very bad for you. Coffee, on the other hand, has been determined that in moderate amounts is actually pretty good for you. (I'm sure that probably is debatable, so we'll get an email or two telling me I'm wrong, and that's fine).
Regardless, people go into Starbucks day after day after day. They have Starbucks in their house every day. Coffee is just a ritual here in the States, particularly, but it's not just coffee. It's tea. They're getting their name into the juice game. They've got some food ideas. Starbucks has done a very good job of building a business based on repeat purchases, based on customer loyalty, and really has become a ritual for many people.
What that then affords them is pricing power. You will see that every once in a while they're able to raise prices on a cup of coffee. Maybe it's five cents. Maybe it's 10 cents. It doesn't seem like much to you, as the consumer, but when you multiply that times hundreds of thousands of beverages that they sling on a daily basis, it really adds up. And they've demonstrated that ability over the years, which is why it's worked out to be such a good investment.
Southwick: The other day my husband and I went to get a cup of coffee, and I realized (not until after I bought that cup of coffee) that I paid like $3.50 for a cup of coffee. I said, "What just happened! How did that...? What did I...? I guess I better really enjoy this cup of coffee." But that gets to your point about they did it. They raised the prices on me and I didn't even think about it. I just bought it.
Moser: The other interesting thing is in today's society we're using mobile so much more in paying for things that a lot of times there's never any cash that changes hands. And when there's no cash that changes hands, you're less apt to actually note what you're paying. You'll notice it afterwards like you did, but you're not going to tend to look at it up front, because...
Southwick: Just pull out your phone. Boop! Done!
Moser: ...it goes right through your phone and is done, so they've done a wonderful job of building up that mobile presence, as well. It's really paid off.
Southwick: So strategy -- you want to look for pricing power. You want to look for a business model that's based on repeat purchases, recurring revenue, and that they're serving a big, growing, dynamic market. Does that sound about right?
Alison Southwick has no position in any stocks mentioned. Jason Moser and Robert Brokamp, CFP own shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. 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.