I was recently asked a simple but thought-provoking question: What stock would I buy if I could buy only one?
At first, it seemed like a simple enough query, as all I had to do was choose one from the many that I already own and/or follow. The more I thought about it, though, the more complicated it became.
Follow along to see which stock I chose and my reasons for doing so.
My initial strategy
My initial strategy was to identify stocks with massive upside potential. The first to catch my attention were SodaStream International
It isn't an exaggeration to say that these companies were the darlings of Wall Street for much of 2011. SodaStream nearly tripled in price at one point, going from $27 a share in January to more than $77 a share in August. And over roughly the same period, Green Mountain had gone from $33 a share to more than $110, an increase of 218%!
In addition, both companies employ the favorable razor-and-blades business model. Owing its name to the Gillette Co., the maker of disposable razors, this model refers to any business practice in which a company offers a one-purchase product that is complemented by additional components that the consumer must buy repeatedly in the future, e.g., blades for a razor.
In the case of SodaStream and Green Mountain, the one-time products are the soda- and coffee-making machines. The additional products are the refills. In either case, you can't have one without the other. And in this way, both companies have sought to shore up future revenue streams by means of repeat sales.
But what giveth may also taketh away; despite their early allure, the price of both stocks cratered in the latter half of last year. SodaStream plummeted from more than $77 at the beginning of August to around $28 by the end of November, falling as much as 26% on a single day. Green Mountain followed suit, going from $110 a share down to $40 a share in less than two months.
If I were to buy only one stock, in turn, it couldn't be either of these, as I'd never be able to sleep at night while my capital was vulnerable to such caprice.
Getting more realistic
The fact that I wouldn't risk everything on a speculative growth stock, of course, doesn't mean that growth isn't important. Indeed, capital appreciation is the name of the game. It's the reason I invest, and I suspect it's the reason you do, as well.
But there's a difference between speculative growth and measured, sustainable growth. Speculative growth is akin to that discussed above. While its potential is intoxicating, it's also subject to rapid deflation at any moment. Netflix
As you can see, the online and by-mail movie rental company had an impressive run in terms of share price from the beginning of 2010 until about halfway through last year. It then fell out of bed, as they say, after the company announced plans to split into two separate entities -- one for streaming services and the other for its traditional DVD-by-mail business. Although these plans were later abandoned, the damage had already been done, as the share price had decreased by as much as 80% at one point last year.
Sustainable growth, on the other hand, is much more measured in nature. It has a longer history behind it, and a company with sustainable growth most likely has a durable competitive advantage -- which Warren Buffett refers to as an economic moat.
According to the Oracle of Omaha, "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company, and above all, the durability of that advantage." Buffett went on to say that the "products and services that have wide, sustainable moats around them are the ones that deliver rewards to investors."
While an economic moat derives from a variety of sources, two of the most important are a company's size and brand entrenchment. Size imparts economies of scale, meaning that larger companies can offer products at a lower cost than smaller ones. And brand entrenchment accords pricing power. In terms of the former, think McDonald's, which profitably sells hamburgers for a fraction of what you or I could. In terms of the latter, think Apple
Settling on one stock
With this in mind, and after much though, I've concluded that if I could only buy one stock, it'd be the consumer products giant Procter & Gamble
Like McDonald's, P&G clearly has size on its side. It's a Fortune 500 company with annual revenues in excess of $80 billion and a market cap of nearly $180 billion, making it the 10th largest company in America. Like Apple, its brands accord it significant pricing power. At last count, the company owns 24 billion-dollar brands ranging from Tide laundry detergents to the aforementioned Gillette razors -- though it is selling its Pringles division. And lest you think that its size inhibits growth, the stock almost doubled for shareholders over last 10 years, nearly twice the 51% return of the S&P 500.
While this isn't a stock pick that will impress anyone with its ingenuity, perhaps that's just the point, as some of the best finds are often in plain sight. On the other hand, if you are looking for something different, then you should check out our new free report, "The Motley Fool's Top Stock for 2012." In it, our chief investment officer identifies his absolute favorite company for the year. To access the report before the rest of the market catches on, click here -- it's absolutely free.
Foolish contributing writer John Maxfield does not have a financial position in any of the companies mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Procter & Gamble, Apple, Green Mountain Coffee Roasters, SodaStream International, and Netflix, as well as creating a bull call spread position in Apple and a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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