The following is a modified version of an article written by Karl Thiel and originally published in the May 2010 issue of Motley Fool Rule Breakers.
Your tastes are your own. But, as your mother probably told you, "You'll never know if you like it if you don't try it."
Yes, we're talking about stocks, but your mom was on to something. When you're considering which stocks to add to your portfolio, you should always ask yourself: Do I like what this company does, and will it be fun to follow? Sometimes you might not have an answer, and that's when it can help to remember your mom's advice.
Buying a new stock -- in fact, buying any stock -- requires leaving your comfort zone. This is particularly true if you're investing in a new and unfamiliar industry. Here's some help to get you started thinking about consumer stocks.
There's one thing that makes consumer stocks easier to invest in than other companies: The businesses are easy to understand. It doesn't take much ink to explain what Chipotle Mexican Grill (NYSE: CMG) and IMAX (Nasdaq: IMAX) are all about. These companies sell stuff for more than it costs to make, market it, and then pocket the difference. Simple!
The hands-on experience of researching consumer stocks can give them an edge in the fun department.
You'll notice if Chipotle's lines of customers disappear, or if the latest Take-Two Interactive game is lousy. When you catch the latest flick at your theater, you'll know whether you're stunned by the larger-than-life experience that IMAX provides, and willing to pay for more of it.
But business concepts aren't always as tidy as Chipotle's tightly rolled burritos. If you're investing in retail or restaurants, you need to understand same-store sales (aka comps), traffic, and expansion. You also need to understand inventory and working capital, and be familiar with the cash conversion cycle.
None of this should scare you. Retail stocks give you a research option you don't get with other investments: the chance to experience the business for yourself. This is when your mom's maxim takes on a new dimension.
This isn't a surefire method for finding winners. The point isn't to spot every popular trend in its infancy; it's to apply your own taste and personal judgment to your investing research. And when you've experienced a great product and the sales trends are taking off, too, as is the case with Chipotle and IMAX, then you may have a long-term winner on your hands.
If you don't drink it ...
For example, I've never understood what keeps people coming back to Starbucks (Nasdaq: SBUX). As a non-customer, the company was out of sight, out of mind. And that probably caused me to miss one of the great investments of the 1990s and early 2000s. But I likely would have been a lousy Starbucks investor. I would have wanted to sell with each new bump, and I'd never have added to my position as the stock increased. So even though I know I missed out, I can look back on my decision not to invest in Starbucks with aplomb because the company doesn't give me a buzz.
Consumer spending represents about 70% of U.S. gross domestic product, and there will always be new opportunities to invest in retail stocks. The trick isn't only to find the best ones; it's also to find the ones that you're happy to take advantage of. So give those products a try, and keep your investing eyes open when you're shopping.
