As the portfolio manager of the Fidelity Magellan Fund from 1977 to 1990, Peter Lynch created an incredible track record, averaging a 29.2% annualized return and establishing himself as one of the world's greatest growth investors. Lynch also wrote bestselling investment books, encouraging investors to invest in what they know and understand, using their observations from the real world to drive their investing decisions.
While Lynch acknowledged that was only the beginning of the research process, he strongly believed investors could beat the market by focusing on things they encountered in their everyday lives. In his investment classic One Up on Wall Street, he wrote:
During a lifetime of buying cars or cameras, you develop a sense of what's good and what's bad, what sells and what doesn't. If it is not cars you know something about, you know something about something else, and the most important part is you know it before Wall Street knows it. Why wait for the Merrill Lynch restaurant expert to recommend Dunkin' Donuts when you've already seen eight new franchises opening up in your area?
Here are three consumer stock picks I believe Peter Lynch would love, not only because most investors will understand how these companies operate but because the fundamentals support the story, too. Let's take a closer look at Domino's Pizza (NYSE:DPZ), Home Depot (NYSE:HD), and the Walt Disney Company (NYSE:DIS) to see why this is the case.
The leader in the food delivery wars
While Domino's has enjoyed a monstrous run since 2010, it has not fared as well this year, with shares down about 3% while the S&P 500 index has advanced more than 18%. In the pizza chain's second quarter, global sales rose to $32.2 million, a 4.1% increase year over year, and earnings per share grew to $2.19, a 19% increase over last year's second quarter. This top- and bottom-line growth was on the back of U.S. same-store sales growth of 3% and international same-store sales growth of 2.4%.
While these numbers are solid, after seeing average 7.4% domestic same-store sales growth and 6.2% international same-store sales growth since 2010, investors were disappointed and sold the stock off. One of the reasons for the slower same-store sales growth is Domino's fortressing strategy, which requires the chain to open more stores in given areas, even if it means infringing on existing stores' sales in the meantime. While this might lead to strained relations with its franchisees in the short term, management is convinced this will lead to long-term success. In the company's second-quarter conference call, CEO Richard Allison stated:
Fortressing continues to be the right long-term answer for the brand and I am pleased with the strong support for this strategy within our franchise system. Our data-driven approach to territory assessment has created a meaningful, educated conversation around how we can best continue to win the long game by establishing closer proximity to households, driving carry-out, shrinking delivery areas, improving service and lowering cost per delivery for franchisees. This approach is also creating meaningful opportunities for our franchisees to grow their enterprise profitability.
With its focus on long-term sustainability over short-term results and an easy-to-understand business model, Domino's should provide patient investors with market-beating returns.
A home improvement giant
There is hardly a homeowner in America who isn't familiar with Home Depot, one of the two nationwide home improvement chains. The company's stock has risen almost 34% year to date on the back of strong execution and hopes that lower interest rates could fuel large home improvement projects.
In the company's second quarter, revenue rose to $30.8 billion, an increase of only 1.2% year over year, and earnings per share (EPS) grew to $3.19, a 3.9% increase over last year's second quarter. In addition to the tepid top- and bottom-line growth, the company also lowered its same-store-sales full-year guidance.
With such lackluster results, why is the stock up so much? Because the company was hurt by bad weather and rapidly falling lumber prices, two areas well beyond its control. In areas where Home Depot controlled its own destiny, the company fared much better.
After Home Depot improved its website's search functionality and its delivery capabilities, online sales grew 20% year over year. After the company introduced pickup lockers in more than 1,100 locations, 50% of online orders were picked up at the store. The company is also working hard to improve its in-store experience, launching initiatives such as digital price tags so customers can see product ratings before making large purchases and making front-end store improvements so customers can check out faster.
The house the mouse built
I don't think I'm going out on a limb when I say that most consumers in developed markets not only are familiar with Disney's content but are fans of at least some of its intellectual property (IP). With assets ranging from Pixar and Twenty-First Century Fox to Star Wars and Mickey Mouse, Disney has something in its stable that is likely to please everyone.
The key to Disney's business model is how its operations synergistically feed each other. For instance, when a new Toy Story movie is released, it not only generates revenue for its studio entertainment division but also creates more demand for Toy Story rides and attractions at its parks and for future consumer products featuring the beloved Woody and Buzz Lightyear.
While Disney's stock has traded within a range for the past several years due to fears over cable's declining subscribers, this year, the stock has risen 18.5% due to several catalysts, including:
- The launch of Disney+, the company's streaming network, later this year that will feature a large quantity of classic and original material.
- The acquisition of Twenty-First Century Fox's assets, bringing even more valuable IP, such as The Simpsons and Avatar, into the Disney fold.
- The continued outperformance of Disney movies at the box office, producing five of the six top-grossing movies this calendar year, with another Star Wars movie and the Frozen sequel still to come.
Good content is hard to replicate and impossible to disrupt, making Disney another long-term winner that I believe Peter Lynch would approve of.