Want a stock windfall? Bet on these big brands

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Want a stock windfall? Bet on these big brands

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These six consumer stocks have phenomenal 25-year returns, proving why investors like Warren Buffett stick with them in good times and bad.

If you pay close attention to stock market news, you may be aware of the struggles among some big consumer brands, including Coca-Cola and McDonald’s, to remain relevant and grow sales. Yet long-term investors in these stocks probably aren’t overly concerned. Why? Over the past 25 years, these brand-name stocks have turned in eye-popping performance.


Turns out you don’t have to be Google (NASDAQ: GOOGL) to generate a “ridiculous” return. Like Warren Buffett, all you have to do is tune out the market noise and be willing to stick with consumer stocks for the long term.

The next time you go shopping for a cold Coca-Cola (NYSE: KO), a tube of Colgate (NYSE: CL)toothpaste or one of Procter & Gamble (NYSE: PG)‘s Gillette razors, consider picking up a few shares in the company, too. Since 1990, these stocks have skyrocketed, climbing 771 percent, 1714 percent and 909 percent, respectively.

Other brand-name businesses have gone gangbusters as well over the last 25 years. PepsiCo(NYSE: PEP)‘s up 866 percent, McDonald’s (NYSE: MCD) has risen by 1099 percent, Walt Disney(NYSE: DIS)‘s climbed by 1052 percent, and the list of well-known operations that have vastly outperformed the S&P 500’s 508 percent gain goes on and on.

While these companies may not be as exciting as the tech sector’s high fliers, it’s these kinds of long-lasting brand-name operations that have been keeping portfolios afloat in good times and bad for years.

“Investing is rooted in financial strength, great management, a good business outlook and competitive advantages,” said Craig Fehr, a St. Louis-based investment strategist with Edward Jones. “Brand-name companies tend to posses a lot of these characteristics.”

Although some brand names have crushed the S&P 500 performance and others haven’t come close, overall, consumer brands have a compelling long-term track record.

The S&P 500 Consumer Staples (Exchange: .5SP25) sub-index, the sector where many of the most well-known businesses reside, is up 749 percent since 1990, which is more than 200 percentage points higher than the S&P 500 over the same time period.

The outperformance, in part, is because they’re large, diversified operations that tend to perform better in a downturn. Between October 2008 and the market’s trough of March 6, 2009, the S&P 500 Consumer Staples sub-index fell by 29.68 percent, compared to 41.14 percent for the S&P 500.

That works both ways: These consumer stocks haven’t done as well since that trough. The subsector’s up 142 percent compared to 200 percent for the benchmark-in part because people have scooped up faster-growing discretionary and technology stocks in the bull market, Fehr said.

But the reasons to buy and hold these name brands hasn’t changed.

“These companies tend to be less discretionary-it’s toothpaste and soft drinks-and people buy these goods whether the economic conditions are good or bad,” Fehr said. “Earnings are stable when you look over a broader time frame, and these companies have fared quite well through multiple market cycles.”

One reason why brand-name operations have done well over the years is that they’re the companies that we interact with on a daily basis. When it comes time to invest, it’s only natural for us to buy what we know.

It’s an approach made famous by Warren Buffett , whose portfolio is filled with popular companies. American Express, Johnson & Johnson (NYSE: JNJ), Coca-Cola and Wal-Mart Stores (NYSE: WMT).

“Buffett has always said to buy businesses that you’re familiar with,” said Kevin Grundy, senior vice president of equity research for Jefferies. “A lot of people can relate to these companies because they’ve grown up with them in their fridge.”

Right alongside Buffett in popularizing this investing approach, though no longer a constant figure in the financial headlines, is Peter Lynch, famed manager of the Fidelity Magellan fund. During Lynch’s heyday-when Magellan was the biggest and best-performing mutual fund-he popularized the concept of investing in brands he came across in his everyday life and came to like, such as Dunkin’ Donuts (NASDAQ: DNKN).

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Investors can count on fairly stable earnings and revenue with consumer-brand stocks. For example, between 2000 and 2007, Coca-Cola’s annual revenues bounced around between $26 billion and $30 billion, according to S&P Capital IQ. Over the last four years, its top line has stayed within the $47 billion to $53 billion range.

While this may lead to criticism of the companies for limited growth, the stability means many of these companies can predict cash-flow levels from year to year, and that makes it easier for them to pay-and grow-dividends, Grundy said. Right now the consumer staples subsector has a 2.68 percent yield, which is higher than the S&P 500 2.08 percent payout.

History is littered with famous names that have struggled or even gone bust. The once mighty JC Penney (NYSE: JCP), for instance, is down 76 percent since 1990, and it’s at its lowest price since 1982. And even Buffett doesn’t love every consumer stock equally or hold them forever. His Berkshire Hathaway (NYSE: BRK.A) recently sold its stake in P&G as part of Berkshire’s acquisition of Duracell, the P&G brand he really wanted to keep. Buffett originally came into a ton of P&G shares because of its acquisition of Gillette, a stock he liked better on its own.

The companies that do well over time are the ones that continue to innovate, said Erin Lash, a senior equity analyst with Morningstar. That doesn’t necessarily mean coming out with new products, though that can be part of it, but it can also involve new types of packaging, better branding and more.

“It’s not just line extension,” Lash said. “Coke’s come out with different size cans; Hershey’s selling its offerings in resealable bags; Campbell Soup (NYSE: CPB) is coming to market with different kinds of pouches. It’s not about replacing a product, it’s about giving consumer increased convenience.”

For investors, seeing this kind of innovation is important. A company that rests on its laurels, even one that everyone’s heard of, will suffer, but it’s also crucial that these business meet the same standard of any good investment, Lash said.

International diversification is another important feature of consumer stocks, even though right now a strong U.S. dollar is making these companies’ non-domestic profits weaker in the short-term.

Many of these businesses experience modest growth only in America, which means earnings expansion must come from overseas operations, and especially from emerging markets.

While the developing world’s growth has slowed, the long-term story-millions of people moving into the middle class-hasn’t changed. However, investors should consider businesses that have been in emerging economies for years, not ones that have yet to enter the region, Lash said.

For example, Colgate generates 80 percent of its sales internationally, with 50 percent coming from emerging markets. She likes the business not only because of that overseas exposure but because it’s been in that area for decades.

“It’s been around for more than 50 years,” Lash said. “It understands the consumer and the routes to market, and obviously, we view that very favorably.”

Price is, as always, important, too, but it’s not the be all and end all with these companies. The consumer staples sector is trading at about fair value today, so many of these brand-name businesses aren’t as attractive from a price standpoint as they were a few years ago. But if you hang on, you should still be rewarded.

“Valuation does matter, but over the long term it’s not the only thing that matters,” Fehr said.

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What matters more is earnings growth, he said. You won’t see rapid growth like that offered by tech companies, but these operations should grow steadily and consistently over time. Expect to earn high single- or low double-digit total annual returns with fairly low volatility, which is a decent haul in today’s low-interest-rate environment.

That is the profile that makes these kinds of companies form the basis of a good long-term portfolio.

“There’s something fundamental about these companies,” Fehr said. “It’s how a lot of people first invest. I buy products, so I know the company and I know it’s successful. You need to look at other metrics, but looking at brand names is a good start.”

By Bryan Borzykowski, special to CNBC.com