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3 Stocks Anyone Can Understand

By Jon Quast - Feb 20, 2020 at 8:10AM

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It doesn't get much simpler than a candy maker, an avocado distributor, and a camera company.

Understanding the companies we invest in is the first step of investing, and it's easier to do than you might think. In fact, Tootsie Roll Industries (TR 0.06%), Calavo Growers (CVGW 0.94%), and GoPro (GPRO -1.55%) are three diverse businesses so simple that anyone can understand. And once you grasp these three stocks, you'll get the confidence boost you need to try to understand any other stocks you're interested in. 

Tootsie Roll

An iconic candy company, Tootsie Roll Industries was founded in 1896. It's a simple business: 99.6% of all revenue comes from candy. The company doesn't just own its namesake chocolate chew; it has many candy brands such as Charleston Chew, Junior Mints, Dots, and Dubble Bubble. Ever had any of those in your Halloween pumpkin?

Bowl full of Tootsie Roll products.

Image source: Tootsie Roll Industries.

Through three quarters in 2019, Tootsie Roll generated $389 million from selling its candy. That cost the company only $244 million to make when you consider ingredients and manufacturing. After factoring in all other company expenses like advertising, it has made $50.3 million so far in 2019 in net income -- profit.

While the company is profitable, it's not really growing. When you compare 2019 results with 2018, revenue is up less than 1%. It's understandably hard to find new growth opportunities after 124 years in business. That said, net income is growing much faster than revenue, up 13% year over year. That's because Tootsie Roll management is good at controlling and reducing expenses.

Part of that $50.3 million profit gets paid out as a quarterly dividend to shareholders. The profit works out to $0.77 in earnings per share (EPS) so far in 2019, and $0.27 (35%) has been paid out in dividends. In fact, Tootsie Roll Industries has paid out and raised its dividend every year for 53 years, according to Dividend.com, landing it in the ultra-exclusive Dividend King club.

Calavo Growers

Moving from candy to something that's still tasty, Calavo Growers primarily buys and resells avocados. Founded in 1924 in California, the company was instrumental in bringing avocados into the mainstream. The steady rise in the avocado's popularity has led to market-beating returns for Calavo Growers. The stock is up 80% over the past five years.

Young woman holds an avocado.

Image source: Getty Images.

Slightly more complex than Tootsie Roll Industries, Calavo Growers has three different business segments. Its fresh segment primarily buys avocados and sells them as-is. Its food segment turns avocados into a product, like guacamole. And its Renaissance Food Group segment lightly processes fruits and vegetables, peeling and cutting them before selling them fresh.

Because so much of Calavo Growers' business is related to avocados, the company is susceptible to fluctuations in avocado prices. A bad harvest in 2017 sent avocado prices much higher. Then in 2018, prices normalized. Because of this year-to-year disparity, Calavo Growers' 2018 fresh avocado sales fell 5%, even though avocado volume increased 19%. Imagine if you worked 19% harder, but got paid 5% less, and there was nothing you could do about it. 

The overall health of the avocado harvest is outside of Calavo Growers' control, and can lead to choppy financial results. That said, this is a well-run company that just celebrated a record year in many metrics. One of its strengths is slow-and-steady diversification. For example, its fastest-growing business segment for 2019 was its Renaissance Food Group, growing 7% year over year to $125.5 million. This segment benefits from several consumer trends, like meal-kit subscriptions.

GoPro

We leave avocados behind, but stay in California for GoPro. The action-camera company started as a simple idea. CEO Nick Woodman, an avid surfer, wanted a waterproof camera attached to his arm so he could take nice pictures of his surf sessions. Founded in 2002, this company has now sold over 26 million cameras and grown to define the action-camera category.

The GoPro Max

The GoPro Max. Image source: GoPro

GoPro makes a little money from its subscription membership, GoPro Plus, but the lion's share of revenue is generated through camera sales. In times past, it tried to create other revenue streams. While going public in 2014, it branded itself as an "exciting new media company," envisioning the monetization of on-demand video content created solely with GoPro products. But in 2016, it shut the media division down. Later it would try to create a camera drone business, only to see that fail as well.

While GoPro is easy to understand with only one main revenue stream, camera sales are very different from candy and fruit sales. GoPro must constantly upgrade its cameras as technology improves. That means, unlike the other two companies we've looked at, GoPro has a substantial research and development budget. Looking at preliminary results, for every $100 it generated in revenue in 2019, it spent $11.96 on research and development, down from the $14.57 it spent in 2018. It's expensive, but for GoPro, this is just the cost of doing business. It can either spend money to remain the top dog, or risk getting disrupted by someone else. 

For the fourth quarter of 2019, GoPro sold a record number of cameras. This caused quarterly revenue to surge 40% year over year, and helped it deliver $95.8 million in net income. But profitability is rare for GoPro. It's been profitable in only two of the last nine quarters, and losses have far outpaced the gains over that time. This is in part due to a low gross profit margin --just 35% in 2019. But sales and marketing are also the company's largest expense at 50% of its gross profit. Both the gross profit margin and sales and marketing expense improved year over year, but still need more work if GoPro is to be profitable consistently. 

Another area for concern is GoPro's market. It's true that it absolutely dominates the action camera space. According to NPD Group, 93% of the money spent on action cameras in the U.S. in the fourth quarter was spent on a GoPro camera. Unfortunately for the company, cameras on smartphones have gotten so good that action camera sales are limited. So while it has 93% of the pie, the pie isn't that big, and it's at risk of getting smaller.

Before you invest

Understanding how a company works is an important step for knowing how to invest in stocks. But it's only one step. Just because these three companies are easily understood doesn't mean we should buy the stocks. As we've noted, GoPro struggles with profitability, while Tootsie Roll isn't really growing revenue. if I had to pick one of these three to buy, I'd choose Calavo Growers for steady revenue and net income growth over the years.

In the end, I'd encourage you to stay curious. There are literally thousands of other public companies out there to discover and understand.

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Stocks Mentioned

Calavo Growers, Inc. Stock Quote
Calavo Growers, Inc.
CVGW
$41.78 (0.94%) $0.39
Tootsie Roll Industries, Inc. Stock Quote
Tootsie Roll Industries, Inc.
TR
$35.00 (0.06%) $0.02
GoPro, Inc. Stock Quote
GoPro, Inc.
GPRO
$5.72 (-1.55%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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