In this last iteration of Industry Focus: Consumer Goods (don't worry-we're just moving to Motley Fool Money!), Motley Fool analysts Emily Flippen and Asit Sharma revisit their 2021 consumer goods basket of stocks as well as reflect on lessons learned from investing in the industry at large.

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This video was recorded on Dec. 21, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, December 21st, and I'm your consumer gets host, Emily Flippen. Today I'm joined by Motley Fool analyst, Asit Sharma, as we reflect on not just our 2021 consumer goods basket, but also what it means to be a consumer goods investor at heart. Asit, thank you so much for joining me as always.

Asit Sharma: Emily, thank you for having me.

Emily Flippen: Fools, before we get started, frequent listeners may already know this, but this is actually our last episode of Industry Focus consumer goods, and our second to last episode of Industry Focus before we make our switch over to Motley Fool Money. For those who don't know, in January, we'll be combining our amazing podcasts including Market Foolery, Motley Fool Answers, and of course, Industry Focus into one daily podcast I will air as a redesigned Motley Fool Money. We're really excited for the switch. I think was going to be great. I know there's a lot of big brains working on it behind the scenes. But if you're not already subscribed to Motley Fool Money wherever you get your podcasts, wherever you're listening to us right now in Industry Focus, go do that right now, you're going to miss out if you don't. We really look forward to seeing you on Motley Fool Money in January. I should say with that being said, we're going to talk about this consumer goods basket that we put together at the beginning of the year in 2021, Asit. I know a lot of investors who have been following these five companies we picked at the beginning of the year, we'll be thinking, "Well certainly Industry Focus is no more because these stocks have done so poorly." I want to clarify right off the bat that the performance of our CG basket had nothing to do with the decision-making behind the scenes despite the fact that our stocks have not had a great nine or 10 months.

Asit Sharma: Yeah. I will say this was a very Foolish basket we put together. You and I both have pretty long time frames in investing both for personal portfolios and what we do at the Motley Fool. The stocks that we picked are down as a group in aggregates, but it doesn't reflect what I think the five-year performance with this basket is going to be, I'm going to keep looking at it. We might revisit this at some point on Motley Fool Money, maybe on a yearly basis or every couple of years, at least. I think it's more for this particular podcast, part of the greater strategy. I did ask, Emily, is this a reflection on our stock picking ability? But I was told, no. If that were the case, we'd have two hours. I'm just kidding.

Emily Flippen: Well, for those Fools who maybe didn't follow along with our basket or have since forgotten, our five CG stock basket at the beginning of the year which was picked, if memory serves, I believe in February, which we'll talk about in a minute. But those businesses were Grocery Outlet (GO -5.61%), Beyond Meat (BYND 0.49%), Dollar General (DG 0.70%), Sleep Number (SNBR 0.30%), and Peloton (PTON 1.11%), and we'll talk about these companies probably at a broad scale. But I'll say out of that five, despite the fact that all of them except for one have lost money this year, only one of them, I think, thesis has dramatically changed, which is obviously Peloton. We can talk more about it. We have throughout the course of this year on Industry Focus consumer goods. But when you reflect on those businesses, Asit, what stands out to you?

Asit Sharma: I think what stands out to me, Emily is that we picked some really great stocks with a lot of brand power. That's another reason why I have confidence in this basket of our typical five-year holding period that we urge across services at The Motley Fool. I actually had quoted the dates, I think this was January 19th. We picked this in late January. If I look back on today and saw a bunch of names that were low quality without brand value, without high customer satisfaction, then I'd be worried, then I would feel more like this episode was a mea culpa, "Hey, we messed up. I don't know what we were thinking," but that's not the case. That's the first thing that strikes me. The second thing is that each of these companies, except for now maybe the company whose thesis is a little broken, still have very positive either cash flow or paths to cash flow. This is something that we've talked about through the year. The ability to be efficient with your assets to generate cash is always good when you're investing in the sector because you got to stay ahead of inflation, and really consistent growth of operating cash flows helps you do that. I feel comfortable in those two fronts. What were your observations when you look back and had a moment to reflect?

Emily Flippen: One is, as we said at the beginning of the year, I own all these companies. I bought them as soon as I was legally allowed to after our podcast aired. I'm a shareholder on all these businesses. For the most part, I'm still big fans of these businesses reflecting on their performance. It's interesting to see what I think is a pretty significant divergence in terms of share price against business performance. There's a lot of reasons for that. Peloton withholding, we'll get to that in a minute. But when I look at Grocery Outlet to Beyond Meat Dollar General Sleep Number, these are businesses that I've have really wonderful 2021s. I believe Dollar General's the only one that's up, about six percent, so still trailing the broader markets. But businesses that have had pretty strong years now, I think valuations have pulled back of it, which is in some sense to be expected. But again goes to show that 3-5 year time horizon for all the stocks. It's a little bit sad, rounding out what is I guess just under our first year looking at underperformance. But at the same time, we're fighting on the fact that the thesis for these companies are still very much intact. Now, Peloton is one that I find myself waffling over. I'm still a shareholder, of course, have no plans on selling anytime soon, if nothing else for the interests in watching where this company goes. But I acted maybe, I don't want to say against my better judgment, but against that little voice in my head that's always a pessimist, that's always a skeptic and thought, I've been wrong about brands in the past. I saw metrics for Peloton still do that are industry-leading, really impressive, churned with this business, monthly workouts. These things are really revolutionizing the fitness industry. But I think what I missed was in that voice that is now screaming at me is, of course people don't want to work out and I don't know if that is your takeaway as well, Asit. But it does have me skeptical at the entire at home fitness market, especially after seeing the pullback in Lieu Lemons Quarter, if anybody follows that company. They pulled back guidance cutting more than half for expected mirror sales, they're Peloton competitor. It's something that is not Peloton specific, but is maybe rather representative of the entire at-home fitness industry.

Asit Sharma: Emily, when you follow a stock in nascent industry like connected fitness, you find yourself looking at the metrics very carefully at each earning season, each quarter. Then during the quarter, you'll look at other pieces of data. One that's attracted my interests is the resale prices of Peloton on secondary markets. People who want to move out of cities or just get rid of the Peloton because they're not using it. I know that those are dropping. This is maybe one trend that might supplement your thinking on this idea that people at the end of the day don't like to work out. They'll maybe splurge for that gym membership. They'll get out and take walks. But for a high-end purchase, so many people now are wondering, "Did I really need to spend this much on this piece of equipment?" Now, to Peloton's favorite management has been gradually decreasing their cost to produce these bikes and they've dropped the price points on the bike. If you look back even before the pandemic, that was always the strategy. Is this still a super strong brand with great customer satisfaction? It is. This stock which is our worst performer by far, it's down 75 percent. I've one more comment on that as well. Is there a chance for it to rebound? Well, certainly there is. Where I think both of assert questioning is this macro trend in the industry. How strong is that going forward?

Also, we've had our base with management. We devoted a whole seems like one episode just talking about how management handled the problem with the tread plus, and their ability to make crisp decisions that valued all stakeholders, including the customers who buy their equipment. They were their second strike. With us when we treated this issue several months ago, that's also in the mix when you look at Peloton going forward. I'm 50/50 on it. I see the potential to rebound. Now, is this going to be a killer company that takes over the consumer goods market? Probably not. But in terms of how long one might hold it, that jury is I think still out a little bit. Then last point on that price point, the fact that stock is down 75 percent. We purposely picked a mix of stocks that leaned toward growth, lean toward technology in their business models. Sleep Number is another example of that. They're being challenged just now by supply chain shortages, especially for chips because they use a lot of technology in their beds. This was right at the peak, I think, of this cycle for growth here, stocks we've seen those valuation since January start to decline. Part of this is just timing. I think that'll smooth out. If we come up with another basket, I suggest you maybe wish to do this in February or March on Motley Fool Money. We'll call that the redemption basket. We'll probably get better multiples and maybe look much better at the end of the next year. Some of this is just short-termism when I look at it. Still overall really confident in the brands. Emily already read through these brands, but just to remind everyone, we've got Beyond Meat in there, very strong brand as industry. Of course, Sleep Number, Dollar General, Grocery Outlet and we have Peloton.

Emily Flippen: Well, I'm really excited to see what comes for these businesses. I will say as far as Peloton goes, I was a shareholder in Fitbit also somewhat against my better judgment back in the day and still very much believed in the future of not just connected fitness, but the data and information they collected. I held those Fitbit shares until they were acquired by Google. I expect that I will do the same with Peloton. Not that Peloton will be acquired by Google, but this is not the type of company that I'm ready to throw my hands up on. Perhaps it's for the worst, but I tend to be that person where I'd rather hold on and see what happens as opposed to sell out too early. I'll let my winners win and my losers, I guess they'll just continue to lose. With Peloton down nearly 75 percent, it's hard to see that business coming back to its heyday, if I'm honest. If you're not a long-term investor in that sense, maybe you have no reason in holding on and seeing what is going to happen but for me and my portfolio, I certainly am.

Asit Sharma: Yeah. Same.

Emily Flippen: With that, I know that we're going to be following up on these companies, again, with Motley Fool Money and the future, talking more consumer goods, of course. But I want to get your thoughts, your reflections on what it means to be a consumer goods investor. When you look across your portfolio, what stands out to you, maybe as either one of your best investments or your best lesson, that you've received from investing in the consumer goods industry?

Asit Sharma: I guess my first lesson is that this is an industry that doesn't lend itself to fast growth. But you can buy some phenomenal companies that will pay you great dividends and will have slow and steady growth. Over the years, I've been a Coca-Cola shareholder for a long time. That's done very well for me. A number of other stocks in my portfolio had the same flavor of Coca-Cola. But then I do invest in tech names like Sleep Number and also this industry occasionally has some very fun ideas that you can invest in and do very well if you're alert. I'll just give two quick examples because they're both favorite pet children of mine. Now that we've taken the lumps of our performance on this to a positive side, at the height of the pandemic, I think in March of 2020, I was talking up two stocks I'd recently purchased on our live show, Motley Fool Live. One was Lands' End, and one was Funko, which makes the little bobblehead toys and licenses out. It's basically an intellectual property play. Neither one of those is going to be a software as a service type growth company. But they were both battered down at that point and they obviously had a future. Again, really strong brands, both these companies, cash-flow positive, very decent management teams, not your typical Foolish picks, Emily. It's not like we have high founder involvement and all those other characteristics we're always talking about. But they made sense at the time. I thought, "Look, the bottom here isn't going to be that these are consumer goods stocks so I'll take a chance and they both performed really well. They've been multibaggers since March of 2020. I say that to note that you can have fun in this sector as well. You can build a base of these Steady Eddy stocks and then sprinkle in more adventurous names like we did. Beyond me, I still have a lot of confidence and I like these two fun stocks, my portfolio is still holding onto Lands' End and Funko now and I intend to as we go on. What are your takeaways on this front?

Emily Flippen: If you'll let me drone on, I will drone on forever, but I'll try to summarize it down. The one thing I will say quickly is the episode that's going to air tomorrow, which I believe is our last Industry Focus episode in its current form, the host and I all sit down together and talk about some of the stocks that have taught us the biggest lesson. I talk about a consumer goods business in that episode. I won't spoil it for anybody who is going to listen tomorrow, but I'll talk about a different business today. Also a consumer goods business, of course and that's actually GrowGeneration. The ticker is GRWG. I'm going to tie this back to Peloton because I mentioned at the offset that there's this voice in my head whenever I get in on companies that are innovative, disruptive, have a lot of skepticism behind them, that it's easy to be a pessimist. That little voice in my head, it's really easy to be like, "Oh, this isn't going to work. I'm a total curmudgeon about it." It's been by far the biggest aspect that has held me back as an investor is assuming the worst and not hoping for the best. As a result, it's easy for me to miss out on great opportunities. I don't regret my investment in Peloton because it could have gone the other way and I could have let that little voice win and then be kicking myself on missing out on a company that has done really well. GrowGeneration is the exact opposite of what we saw happen with Peloton. It was a company, still is a company, that operates in the consumer goods space, although I'll say it's a retail company, but it does service a largely professional cannabis growers. They are a retailer of hydroponic equipment. I know we talked about this company on the show in the past. I run a cannabis portfolio here at the Fools, so obviously we talked about it in the context of that cannabis portfolio. But I was a skeptic of this business. I thought, " Oh man, Home Depot is just going to eat this company's lunch."

They're not going to be able to get off the ground. There's so many hydroponic retailers. This is such a small company. They don't have a differentiated strategy and that was a big critical problem of mine at the time was, I don't get what they're doing the other companies aren't. For that reason, I was a skeptic and then as I watched the pandemic come through, sweep through the first half or so of 2020, saw this company get hammered, I thought to myself, "Well, are you saying this because you're a skeptic or you're not letting the numbers, I guess, speak for themselves." The numbers that we saw coming out of GrowGeneration at that time, despite the stock getting hammered, were actually really impressive. I took a very small start-up position in both the cannabis portfolio here at the Fool, as well as my own portfolio, and it was my first 10-bagger so more than 900 percent return on that investment. Despite all the skepticism, there's a short report actually shortly after we purchased in the portfolio, that felt like it was at confirmation bias, I shouldn't have done this, bad investment. The company has performed really well in part because they targeted a niche market that others weren't willing to penetrate, weren't willing to consciously go after. I downgrade or D-played that. I says, "Downplay that, there we go, in my own head. For that reason, when I see companies like Peloton and GrowGeneration, I'm happy to take chances on the companies that maybe I'm a skeptic about it first because the ones that do do well tend to do very well. You can get 900,000 percent return on an investment but you can only lose 100 percent. I guess it's a long, really round about way of saying that you can let your winners win, let your losers lose, but your winners will as GrowGeneration has in my portfolio versus Peloton, make up for those losers over time.

Asit Sharma: So interesting, Emily, because I think this is something that I try to apply in my general investing realm, but you need this muscle even more in this space. I often ask myself something, I'll try to verbalize it like this. It's not a sentence that I verbalize. It's just something now intuitively, I do, or almost reflex, which is to say to my inner voice, "Okay, am I being skeptical or am I failing to exercise my imagination?" Because I've been a skeptic in the past, it's kept me out of some great investments. I think this is part of the journey of becoming a great investor. Not that either of us are great investors. I think we strive to be, we're still in the learning curve. Emily's further along than [inaudible 00:19:22] . But here's the deal, you got to flex that creativity muscle, that imagination muscle, that's the entry point. Then I think you loop background with the skepticism to then push against that. It's not that you have to look at every last stock and say, "How could this be a multibagger?" After some growth of your investing muscles, you'll get a facility with looking pretty quickly and saying, "Well, I know this ain't going anywhere." Emily, we looked at so many S1's over the last year or two. Perspective is, it was like a communal muscle with our listeners that we all developed. After a while, everyone pretty much knew, I think, what Emily was going to wrinkle her nose at us or was going to scoff at. [laughs] Then there were the companies that we both gravitated toward. It's different for every investor. But you got to get to that place where something sparks your curiosity and interest. Let your imagination run some and then try to come in and figure out how it could go wrong. I think if you do that, you'll end up taking more positions in potentially great stocks and not feel as beat up. Because for every Peloton, there is a GrowGeneration. It's just out there for you to find it and take a position, get some of that skin in the game.

Emily Flippen: Well, if you don't mind me pontificating some more here on this last episode. I have to say when I reflect on the last few episodes, did I say last few? Really the last year of episodes we've done on consumer goods, there are just so many amazing companies that I'm excited to see what the future holds for. I had Olaplex and Sanmeet on earlier. Talked about Olaplex. I think about Sweetgreen, I think about the Brilliant Earth, Farfetch, Revolve, The RealReal, that entire industry of what is resold and resale clothing. These are companies and industries that are really just at the beginning of their growth story. I feel like it's a bittersweet moment. I know that this new podcasts, it's going to be everything you're getting in industry focus times a 100, it's going to be wonderful. But I hope that investors don't let those little small corners of the consumer goods market go unnoticed. If you're not pushing yourself as an investor to constantly find these new ideas. Push yourself a little bit out of your comfort zone, your consumer goods bounds here. Expand the definition of what is a consumer goods company as we have done so many times on this podcast then I think you're probably really going to be missing out over the long-term.

Asit Sharma: For sure, and the ideas keep coming. The IPO market is very robust in the United States. Despite years of prediction of doom and gloom, there's tons of innovation going on. I was thinking as you are giving that list Emily, of companies like all birds and on shoes, which are employing this great mix of high-tech and resilient, sustainable processes which you can feel good about investing in. Almost every week, you get a fun perspectives to read through and you have that. If you've got an hour or two, you don't have to be a financial width, you have to be an accountant. You can read the letter from the CEO, let your imagination runs on if you don't like it, put it away, there's no death of ideas that are coming straight at you. I think at least this is the thing, maybe if I had one takeaway, it's that discipline of looking at the ideas of not putting it off because, perspectives is a long time. [laughs] I learned because we're both very busy sometimes you don't have that much time but you get a talent for extracting what you need out of it. Then you can go back, Google up some fun stuff that's peripheral. I always tried to do that and try it today to do that too. A podcast that's already treated it or something about the founders, fill in those details so you flesh in the narrative that's very important in the consumer goods sector, don't you think?

Emily Flippen: Definitely, I know personally, despite the fact that Asit, You and I still continue to work together and all the listeners will still continue to hear us on the new podcast on Motley Fool Money. I have to say one thing after the last couple of years of working with you on Industry Focus is, whenever I do read through a perspective, I always hear your voice in the back of my head. There's this little constant, what would Asit say about this? What would Asit think about this? It certainly helped me grow as an investor. I hope for all the listeners out there who have, I guess, listened alongside us, and I know I've only been here a short amount of time. Many of our listeners have been here much longer than me, maybe even longer than you Asit, although that's a tall order there. But I hope we've all grown as investors throughout this and will continue to grow with Motley Fool Money. Again, if you're not subscribed, go do that right now if you haven't already do it.

Asit Sharma: Yeah. For sure, make sure that you make that new podcast part of your daily diet. Emily, my last thoughts are, I have to say the same. This is partly a function because behind the scenes we work on other products together. But I do have that Emily voice in there, which is keeping me honest and making sure that I look at the internal controls of the company to make sure that I have scoured those numbers and have a good argument there and also understand where the company could go. I always hear our listeners in the background, the questions that we've gotten over so many episodes, all the fun and interesting insights that they bring, that's always in my head, not just with this, but in everything that I do.

Emily Flippen: Wonderful, Asit. Thank you again, so much for joining me, not just today but for all the episodes, we've had the pleasure of doing that. You've had the pleasure of doing it, host in the past, it's always been a blast.

Asit Sharma: Same here, thanks so much Emily.

Emily Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out, you could still shoot us an email at [email protected]. You can still find us on Twitter @MFIndustryFocus. But as always, people on the program may own companies discussed on the show. The Motley Fool may have formal recommendations for or against any stocks mentioned. Don't buy or sell anything based solely on what you hear but do follow us at Motley Fool Money, we're not done yet. Thanks, Tim Sparks who's worked behind the screen today for Asit Sharma. I'm Emily Flippen. Thanks for listening and Fool On!