Investors have a few terms for a blue chip stock that plays a supporting role in a portfolio. But whether these equities are called "core stocks" or "anchor stocks," or something else, their function is the same: They act as a stabilizing force and tend to generate positive returns through a wide range of investing conditions.
These investments exist in every industry, and they're often large businesses that have earned a premium valuation by consistently producing market-beating returns. Below, we'll look at a few prime examples of the stocks in the consumer segment of the market.
1. Procter & Gamble
For decades, Procter & Gamble (PG 0.00%) was known on Wall Street as the king of the consumer staples niche. Its dominant global market position stretches into several product categories that millions of people use each day, including razors, bathroom tissue, and laundry detergent.
That prime position was challenged in recent years by the combination of a few negative industry trends, including the shift toward e-commerce spending and a flood of private-branded product introductions from retailers like Walmart and Kroger. But P&G's recent recovery demonstrates just how hard it is to keep the industry leader down for long. Sales growth recently hit a 10-year high as the company raised its 2019 outlook for the second straight quarter.
Besides its recession-resistant focus on consumer staples, a P&G investment comes with several other stabilizing characteristics, including high profitability, strong cash flow, and robust dividend growth. Together, these elements help ensure decent returns for shareholders even through periods of competitive struggles such as in the three years ending in 2018.
Retailing is a famously low-return business that -- thanks to intense competition and volatile sales swings -- tends to destroy shareholder value more often than it creates it. Costco (COST 2.09%) is a different story entirely, though.
The warehouse retailing giant straddles the line between a consumer staple and a consumer discretionary business. It sells plenty of recession-proof products like pantry food and groceries, just as Walmart does. But Costco also moves high-margin electronics that make its sales base look more like Amazon's.
The real magic behind its stellar returns is the chain's subscription fee base that forms the foundation for earnings growth. That membership income is far more stable than the gross profit margin that Walmart generates through product sales. It's no surprise, then that Costco's operating income has jumped 40% in the past five years, compared to a 19% decrease for the world's biggest retailer.
There are many attractive growth stocks in the sports apparel industry today. lululemon athletica is boosting sales at a 20% clip, for example, and racing toward its first year of $4 billion in annual sales.
Yet investors seeking a core holding are better off buying Nike (NKE 2.50%) shares. Yes, it is cheaper at a P/E ratio of 35 compared to 50. But the sports giant has some other competitive assets that suggest it will remain a dominant force in the industry 10 or 20 years from now.
Take its global sales base, with dozens of hit brands like Air Jordan, Nike, and VaporMax supporting its $39 billion annual revenue haul. Nike also routinely spends the equivalent of Lululemon's sales just on marketing each year. Demand creation expense was $3.8 billion in fiscal 2019, up from $3.6 billion a year earlier. Combine that staggering amount of defensive resources with the world's biggest platform for apparel and footwear innovation, and you've got a recipe for steady, if not robust, growth over the long haul. That's exactly what an investor should be looking for in a core portfolio holding.