The problem with owning stocks you don't understand is that it's hard to know what to do when bad (or even good) news arises. Should you sell? Or maybe hold? You might not have enough context to make an informed decision, and at that point, you are really just guessing.
That's not the best way to invest your hard-earned money. Here are three companies you may already be familiar with as a customer that are easy to understand and might just deserve a place in your portfolio.
1. Chipotle: Good food served fast
It started as a simple concept: have a limited menu of fresh ingredients and build a made-to-order burrito quickly with an efficient serving line. Chipotle Mexican Grill (CMG -0.76%) has been executing this model since it was founded, and the metrics are easy to grasp: More burritos means more revenue. Serve more customers per store and margins improve. Add more stores and revenue grows even more. This was the story of this fast-casual restaurant for its first 22 years of operation.
But in 2015, Chipotle hit a bump in the road when some customers got sick from E. coli and norovirus outbreaks. When things go wrong, this simple business model works against you. When news spread of burrito lovers getting sick, many people reduced how often they visited or stopped coming altogether. Fewer people visiting stores means less revenue. But locations still incur costs just to stay open, which hurts margins.
The company has been working hard to put these events behind it. Along with instituting new food safety measures, Chipotle added new menu items and a loyalty program, improved its ordering app, and created a new advertising campaign in an effort to get burrito fans to come back. These moves are starting to pay off, and the stock has responded by bouncing back near all-time highs. Patient investors who have held the stock over the last 10 years have been rewarded with solid market-beating results.
2. Home Depot: Taking care of customers
It's an easy strategy to understand: offer a wide array of products for the home and ensure customers have a great experience interacting with the brand. Home Depot (HD 1.22%) is known for having knowledgeable orange-aproned associates to serve in-store visitors. Further improving the customer experience, it's investing in its One Home Depot initiative to allow do-it-yourselfers (DIYers) to have a frictionless ordering experience whether it's online or in the store.
In addition to the DIYers, Home Depot has another key customer group that spends even more in its stores: professionals. That only makes sense, as their business relies on having the right materials to build, repair, maintain, or remodel homes or office spaces. The company has created a business-to-business (B2B) website specifically for pros to make it easier for them to purchase goods, track spending, and receive bulk discounts.
Some financial metrics are also easy to understand like sales per square foot, same-store sales, and average ticket. As sales per square footage goes up, the company is getting better utilization of its brick-and-mortar stores. As same-store sales increase, revenue per store is increasing, also helping margins. Lastly, as average ticket sales go up, customers are spending more every time they visit.
This strategy of taking care of customers has paid off for shareholders. Owning Home Depot over the last decade has brought them not only market-beating returns but also a nice income stream of dividends.
3. Apple: Making insanely great products
Apple (AAPL -0.04%) almost went bankrupt in 1997. It had expanded too fast and had too many products. Founder Steve Jobs came back as CEO that year and saved the company with a simple strategy. He kept 30% of the products that were great and cut the other 70%. He brutally trimmed the development roadmap to focus on only four products: one desktop and one laptop each for the professional and the consumer. Today, Apple continues to have a small and focused product set but sweats all the details to make each what Jobs called "insanely great."
This focus on building great products has resulted in the iPhone becoming the company's flagship product and the largest source of revenue. With more than 2 billion iPhones sold since 2012, this large customer base attracts developers who build apps for its app store, which is another source of revenue. Having more apps available makes its mobile devices more attractive to buyers.
Computers, tablets, and accessories round out its product offerings via its high-throughput retail stores and website. Although iPhone sales have leveled off (or even declined on occasion) recently, revenue for apps, accessories, and services for mobile devices is growing. The 10-year stock chart for Apple looks very similar to those of our other easy-to-understand companies.
Even though the stock has already had a great run, Apple's continued focus on making excellent products still gives investors plenty of things to be excited about.
One advantage that sets these easy-to-understand businesses apart from other stocks is that investors have the opportunity to interact personally with these brands as customers. If you like to keep a close eye on the companies you own, these three just might be worth adding to your portfolio.