Over the last few years, there have been no sustained broad market sell offs that offered investors the opportunity to buy high quality stocks at a meaningful discount. If the current correction, (currently 9% in the S&P 500 from the September highs) turns into something deeper, then you may finally get an opportunity to buy your cult favorite without chasing highs.
While the current bout of volatility appears to be driven by external factors, it is important to note that even at the depths of the financial crisis, when unemployment hit double digits and housing was in a free-fall, there was always a sort of resilience from the high-end U.S. consumer. While most premium U.S. consumer brands felt the effects of constrained spending power in 2008 through 2010, it appears that many decided to spend their way out of recession, so to speak, and invest in innovation in their sector in an effort to gain market share and future earnings leverage.
Apple (AAPL) kept chugging away on smartphone innovation and introduced a new consumer electronics category in the iPad in April 2010 when the unemployment rate was still near 9%.
In August of 2009, when it still wasn’t clear that the financial crisis was over, Disney paid the seemingly large sum of $4 billion for Marvel entertainment, but since then have released nearly a dozen superhero movies that have grossed easily 2x that amount at the box office and probably multiples of that in video sales and apparel. Oh, and they appear to be doing it again, with their 2012 $4 billion purchase of LucasFilm for the Star Wars franchise.
After a period of stagnant sales growth from 2008 to 2010, Nike went deep with the NFL with a billion apparel and jersey deal in 2010, while also flexing their muscle in the rest of the world with the other football. That has led to great success in emerging markets. Nike’s sales are expected to be up nearly 100% from fiscal 2007 through fiscal 2015 (current year).
The Google guys keep doing what they do best, dominating in search. And while they have done little else on the new product front to make a dent in their revenue model, Android, their mobile operating system, has achieved near monopoly with 85% global market share in Q2 of this year. In my opinion, this dramatic success has little to do with innovation, but lots to do with opportunity, necessity and cost, and it is dominant nonetheless and not something I would have expected back in 2008 when it launched.
And then there is Starbucks. Just as it appeared a few years back that Americans may think twice about dropping 5 or 6 bucks on their daily vente Frappe, the company pivoted to prepared foods to compete with the likes of Panera with their buy of La Boulange in 2012 and their buy of Teavana the same year to broaden out their cold drinks offering.
What all of these companies have in common is that in the heights of our recession, and in the very uncertain period after, they never lost sight of the future, asserting themselves a place in our collective wallets and in some cases, our hearts.
So the point is this – for those who felt they missed the boat in some high quality stocks of companies who products you can’t live without, whose valuations got a bit stretched in the latest leg of the bull run, opportunity might be brewing. I guess it’s a bit old school, but no matter how good or bad things get, every morning I am gonna strap on my Nike Flyknits, throw my iPhone in my pocket, catch Sportscenter, search without even thinking 10x a day on Google and grab the ol Vente frappe and pay for it with my Amex card.
On a meaningful market decline, something of the 15-20% variety in the coming weeks/months, I would look to average into what I would call my consumer TefLong™ portfolio.
So where would I start to pick up these stocks?
AAPL: Unchanged on the year, at $80 back to the level of its fiscal Q2 earnings gap in April. Sounds like a long ways away, but I’ll be patient (I currently have a bearish trade in the name). It’s a fairly crowded trade aside from what some would have you believe about institutional ownership. At $80, the stock would have more than 1/3 of its market cap in cash & a dividend yield close to 3%. I would say at that point, it would once again be approaching the “no-brainer’ category.
DIS: Expensive stock, we have a short biased trade on (read here). The company is actively managing earnings through buybacks, but at $70, I am a buyer in front of years of Star Wars crap and however more Avengers they make, and ESPN will always rock.
GOOGL: One of the few mega caps on the planet with double digit earnings and sales growth that trades at a market multiple. Down 20% at $400, would be a great place to start
NKE: Expensive stock, and will always trade at premium to peers and market, but not exactly want to buy when expensive to its own historical valuation. I start buying $75, $70 would be a dream.
SBUX: I am probably the least enthusiastic about this one given its poor relative strength over the last year, but their international growth opportunity is fairly unique for a U.S. brand. Double digit earnings and sales growth expected for years, but like NKE expensive to its historical valuation. I start buying at $60.
AXP: Double digit earnings growth, mid single digit sales growth, trades below market multiple, very high quality brand. Not interested here, but i’d start picking at $70.
So there it is, The Teflongs™ and my preferred entries. Let’s see if we get the opportunity. I think it’s possible.
A girl can dream, cant she??