2 Stocks To Watch In Popular Hobbies: GoPro Inc and Michaels Companies Inc

By Leo SunFool.com

Famed investor Peter Lynch once told investors to buy "what they know". That advice is still a good mantra for novice investors, who can use brands that they like as starting points for investing research. An easy category to start with is popular hobbies. By understanding the things that people do in their free time, we can see which companies stand to benefit and how their stock prices will be affected.

Source: GoPro.

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Today, we'll discuss two companies that focus on active and artistic hobbies -- GoPro and The Michaels Companies .

Active hobby stock: GoProOver the past decade, GoPro carved out a niche market for tiny and rugged wide-angle action cameras. GoPro's popularity with surfers, skateboarders, skydivers, and other outdoor adventurers turned its brand name into a household byword for all action cameras. According to IDC's most recent numbers, GoPro still controls nearly half of the worldwide action camera market.

GoPro went public last June at $24 per share. Since then, the stock surged to the $90s before tumbling back to the mid $20s. The first part of GoPro's crash can be attributed to overheated valuations, while the second part can be attributed to concerns about the company being a "one trick pony".

Source: GoPro.

Unlike smartphones, there's no contract-bound upgrade cycle for GoPro cameras, which causes customers to keep using "good enough" cameras. GoPro's high-end Black and Silver devices are still selling well, but the Session -- which tried to reach mainstream customers with simpler controls and a smaller form factor -- fell short of expectations. These problems caused GoPro tomiss both top and line expectations last quarter, marking its first big miss since going public. Since GoPro won't launch a new high-end camera before the end of the year, it also offered weak guidance for the holiday quarter.

But looking ahead into 2016, GoPro will launch a new spherical rig for VR films, a quadcopter, and next-gen cameras. These new devices could generate better comparisons against 2015, when GoPro didn't introduce any new top-tier devices. Moreover, GoPro now trades with a 5-year PEG ratio of 0.7, according to Thomson Reuters' estimates. Since a PEG ratio (one of Lynch's favorite metrics) under 1 is "cheap", GoPro can be considered a value play at current prices.

Artistic hobby stock: The Michaels CompaniesGoPro is a great outdoor hobby stock, but Michaels Companiesis ideal for people who prefer less active hobbies like arts and crafts. The company generates most of its revenue from its namesake arts and crafts specialty retail stores, but it also owns art supply and framing companies Aaron Brothers and Artistree of Canada. Michaels' niche in providing specific supplies for arts, crafts, and hobbies has protected it from being marginalized by e-commerce giants.

Source: Pixabay.

Last quarter, Michaels' revenue rose3.8% annually to $984.3 million, missing estimates by $1 million, as comparable store sales rose 1.6%. But on a constant currency basis (adjusting for the Canadian dollar), sales rose 5.2% while comps increased 2.9%. Gross and operating margins also expanded, while adjusted diluted earnings per share rose 21% to $0.17 per share and beat expectations by a penny. Those numbers are impressive considering that many big box retailers have struggled with comps and margins growth while competing against top e-commerce sites.

On the digital front, the company has been expanding its Michaels Makers blogging program, which features bloggers participating in monthly craft challenges. The most recent challenge was viewed by over 11 million potential customers. To expand the Maker program, Michaels recently partnered with Darby Smart, an online arts and crafts community and shop. It's also working with Pinterest to reach more customers and test out the social network's new "buyable pins" program.

Michaels stock briefly dipped in July after it announced a secondary offering of 12.5 million shares by selling shareholders. However, the stock still remains up about 30% over the past 12 months, and its P/E of 16 isn't expensive compared to the industry average of 18 for specialty retail stores. Michaels also passes the PEG test with a ratio of 0.8.

Do your own homeworkGoPro and Michaels are interesting stocks to watch, but investors should do their due diligence before buying either one. Investors who can't stomach double-digit price declines in a single day should steer clear of GoPro.Meanwhile, investors who think interest in arts and craft supplies could wane should stay away from Michaels.Nonetheless, both stocks represent interesting ways to invest in popular hobbies, and could make some big moves in the coming year.

The article 2 Stocks To Watch In Popular Hobbies: GoPro Inc and Michaels Companies Inc originally appeared on Fool.com.

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