With a new year come new opportunities for investors. Economists are forecasting moderate growth for the economy in 2016 that will be fueled, in large part, by the consumer. However, not all consumer-goods stocks are created equal. To help you sort the winners from the losers, four Motley Fool contributors explain why Take-Two Interactive , Whole Foods Market , Home Depot , and Lululemon Athletica are the top consumer-goods stocks to own in the year ahead.
Tim Beyers (Take-Two Interactive): Can we really bet on a video-gaming company that's been so deeply tied to the console refresh cycle in years past? Yes, we can. Take-Two Interactive deserves a look because it's a historically cheap stock profiting from rising interest in digital add-ons and new franchises.
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More on the catalysts in a minute. First, let's talk about the valuation. Take-Two commands $2.88 billion in market capitalization. Subtract from that $1.06 billion in cash and add $488 million in debt, and you're left with an enterprise value of about $2.34 billion, which is astoundingly cheap if you value the Grand Theft Auto franchise -- on its own -- at $2 billion, as I do.
It's not difficult to get that number. According to VGChartz, GTA V has sold roughly 49 million units worldwide over the four major platforms on which it was released -- PlayStation 3 and 4, Xbox 360 and One. Price each unit at $41 and you've got $2 billion in sales. (The cheapest copy I found still sold for $39.99 as of this writing.)
Now, let's talk catalysts. Not only is Take-Two's list of available titles growing with the likes of Mafia 3, but also there's licensing revenue to be had from a deal with Lions Gate Entertainment to adapt one of the company's new comic book properties, Z-Men. Further deals seem likely, yet Wall Street values the entirety of Take-Two's non-GTA portfolio at just $340 million. I can't see that holding up for long.
Jeremy Bowman(Whole Foods Market):Whole Foods Market may see like an odd choice. After all, this is the company that suffered an unprecedented identity crisis last year, as a combination of intensifying competition fromKroger Inc. andCostco Wholesale, a scandal involving incorrect weights and prices, and a lofty stock valuation sent shares plummeting 34%. Comparable sales turned negative for the first time since the financial crisis in its most recent earnings report, falling 0.2%.
Despite the headwinds, Whole Foods' position is stronger than it looks. The company is still adding new stores and delivering ample profits. In fact, its margins remain the best in its industry, and 2016 is bringing some more positive catalysts.
Management has settled with New York City officials over the pricing scandal for $500,000, closing the door on that ugly chapter and taking the issue out of the press. More importantly, this year will bring the first five of its new downscale 365 brand of stores. Though analysts pooh-poohed the decision when Whole Foods first announced it, I see it as taking advantage of a growing opportunity in the market. The 365 stores will target the millennial generation, a growing population that wants the kind of products Whole Foods is known for but may not have the money to shop at the high-end stores. The new brand should help the company recapture some of the market it's lost to Trader Joe's and other competitors, and if the new stores are a hit, the stock should respond.
Finally, demand for new Whole Foods stores continues to be high. In Los Angeles' Silver Lake neighborhood, residents circulated a petition for a full-line store in response to Whole Foods' announcement that it would put a 365 store there instead. Dozens of other such petitions from communities across the country are scattered across the Internet asking Whole Foods to put a store in their community. That kind of thing just doesn't happen to your run-of-the-mill supermarket chain.
With demand still strong, management believes it can triple its store count to 1,200 from a little more than 400 today. No doubt Kroger has taken a bite out of Whole Foods' niche, but Whole Foods' stores deliver double the sales per square foot of the average Kroger location,with an even wider gap in profits to boot. Whole Foods is the better business of the two, and the market is making a mistake assigning the same valuation. Comparable sales are fleeting, while brand reputations are lasting. Whole Foods had a rough 2015, but the stock will bounce back in 2016.
Demitri Kalogeropoulos (Home Depot):Sure, it was one of the best-performing stocks on the Dow last year, jumping 25% in 2015. But I don't think that run-up means that it's too late to buy Home Depot.
Spending in the home-improvement market, even though it has spiked from an annual pace of $380 billion in 2010 to over $600 billion now, has plenty of room to grow before it rebounds to the $900 billion high from 2006. That steady market uptick has been the key factor behind Home Depot's epic profit jump lately: Per-share earnings have grown by 25% in each of the past two fiscal years.
Meanwhile, management's commitment to return 50% of profit in dividends has made for some very happy income investors lately. The dividend is up 160% over the past five years and is likely to post another double-digit boost this year.
While the rising spending tide has lifted the entire industry, Home Depot's unusually strong operations shine through when you stack them up against smaller rival Lowe's . Whether it's sales growth (7.3% vs. 5% comps last quarter), profitability (13% vs. 9% this past year), or return on invested capital (77% vs. 32%),Home Depot comes out well ahead of its key competitor. Yet investors don't have to pay much of a premium to own a piece of that stellar performance. Home Depot is currently valued at about 21 times projected earnings, compared with 19 for Lowe's.
Tamara Walsh (Lululemon Athletica): The embattled yoga-apparel retailer might not seem like an obvious choice as one of the top consumer-goods stocks for the year ahead. However, often the underdogs are the most rewarding investments. With fresh leadership and strong trends in the overall "athleisure wear" category that Lululemon Athletica helped create, I believe 2016 will be the retailer's comeback year.
The luxury athletic-apparel company has been stuck in a transitional period in recent years after suffering from a string of product recalls, bad press, and the seemingly sudden departure of its former chief executive, Christine Day. The stock finished 2015 down more than 5% as a result. Shares are now trading in the middle of the stock's 52-week range.
But don't let that fool you. The stock actually looks inexpensive today if you consider its price-to-earnings growth rate of just 1.68, which is significantly below the industry average PEG of 2.11. If 2016 proves to be Lululemon's turnaround year, now is the time to buy the stock.
The company spent much of last year making important investments in its supply chain. These should pay off in 2016. One of these improvements included switching the majority of its shipments from air freight to sea -- a move that will help Lulu save on costs and ultimately boost margins.
Investors should also take notice of Lulu's burgeoning menswear business. Lululemon's new leadership team is putting a greater emphasis on its men's business and expects the segment to transform into a billion-dollar business going forward. That seems achievable for the retailer, given that its men's business is currently growing at a faster clip than its overall business, with same-store-sales growth of 24% in its third quarter.
Together, these things should fuel revenue growth in the quarters ahead and help Lululemon reclaim its title as one of the top consumer-goods stocks.
The article 4 Top Consumer-Goods Stocks to Buy in 2016 originally appeared on Fool.com.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fools board of directors. Demitrios Kalogeropoulos owns shares of Costco Wholesale, Home Depot, Walt Disney, and Whole Foods Market. Jeremy Bowman has no position in any stocks mentioned. Tamara Rutter owns shares of Lululemon Athletica and Walt Disney. Tim Beyers owns shares of Walt Disney. Tim Beyers has the following options: long January 2017 $85 calls on Walt Disney. The Motley Fool owns shares of and recommends Costco Wholesale, Lululemon Athletica, Walt Disney, and Whole Foods Market. The Motley Fool recommends Home Depot and Take-Two Interactive. 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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