Editor’s Note: Related tickers: Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN)
Every so often, life gives us an opportunity that we can either choose to ignore, or reach out and grab. That opportunity for me came this year, in the form of walking away from a comfortable job that paid well, I was very good at, and offered a lot of security.
One of the steps in the process of leaving my job was rolling over my 401(k) into a self-managed IRA. I am still in the process of investing that money, and I plan to share the process here with you over the next few months. I even plan to share the results with you in the Foolish way of transparency.
Today I will discuss how the shift in the way consumers buy, as well as the way brands control the experience, led me to make certain investments that I think will pay long-term returns for me, and they could for you, too.
Image: Apple Inc. (NASDAQ:AAPL)
Consumer preference and brand influence matter
The consumer experience is more important today than at any time in the past. Less than a decade ago, consumers had comparatively little choice when it came to making a purchase. For electronics, there were essentially one or two major retailers to shop at, including the now-defunct Circuit City or Best Buy Co., Inc. (NYSE:BBY), as well as a few regional retailers, plus the local Wal-Mart Stores, Inc. (NYSE:WMT) or Target Corporation (NYSE:TGT).
Back then, Amazon.com, Inc. (NASDAQ:AMZN) was a shadow of the behemoth it is becoming today; buying on the Web was just beginning to emerge as a mainstream option, and brand-focused stores operated by the manufacturers directly were a rarity; mostly outlet-mall fare selling leftovers and reconditioned items that mass retailers wouldn’t touch.
Boy, has that changed:
AMZN Revenue Annual data by YCharts
This is not an attempt to beat up on J.C. Penney Company, Inc. (NYSE:JCP) or Sears Holdings Corporation (NASDAQ:SHLD) as much as it’s a really good reminder that consumer sentiment shifted away from those two once-stalwarts years ago. Their recent struggles aren’t due to recent problems, but to years of ignoring what consumers want: convenience, choice, and incredible customer service. Amazon.com, Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL) have been delivering, and the numbers above show the result. And that’s why both have a place in my IRA.
Valuation: Why it matters and why it doesn’t
Apple Inc. (NASDAQ:AAPL)’s well-known recent share price collapse could almost have one afraid the company is going bankrupt, while Amazon’s insanely high PE valuation has bears convinced that it’s going to collapse in a combined dot-com/bank-crisis bubble at a thermonuclear level. And while valuations such as PE are important, and one that I use to evaluate share prices on a regular basis, it’s not always the best way to evaluate how the market is pricing a stock:
AMZN Price / Sales Ratio TTM data by YCharts
Price to Sales seems to me to more accurately correlate to the way the market prices Amazon. As the chart above shows, even as Amazon.com, Inc. (NASDAQ:AMZN)’s share price has increased, P/S has remained near 2.
It has been well-documented that the company is making significant investments in its future, building out dozens of distribution centers in order to fill orders more quickly. The expectation is that eventually these investments will pay off, and profits will skyrocket. I’m betting that CEO and founder Jeff Bezos and his team will execute this plan, and the market looks to be doing the same thing.
Apple Inc. (NASDAQ:AAPL), on the other hand has seen its P/S drop in correlation with the share price, as well as seeing the PE ratio drop to single digits. Again, looking at historical evidence, factoring in that Apple is still growing near 20% annually as consumers shift away from PC’s and towards more mobile devices like Smartphones and Tablets, even if the valuation metrics like P/S and PE stay where they are today, the share price will rebound.
But my reasoning behind investing in Apple Inc. (NASDAQ:AAPL) is deeper than just the valuation metrics above: Apple has shown a willingness to cannibalize its existing products if it had a better idea. The iPad mini is a good example, and CEO Tim Cook make it clear that Apple Inc. (NASDAQ:AAPL) would not ignore the risk of disruption when he said, “If we don’t, someone else will,” when questioned about the iPad mini taking sales away from the larger iPad.
Add in how the vastly successful Apple Stores, which not only increase profitability, but more importantly to long-term success, allow Apple Inc. (NASDAQ:AAPL) to really emphasize exceptional customer service that traditional retailers just don’t match. And this generates significant brand loyalty that competitors like Samsung can only poke fun of in their advertising, then try to copy the concept by creating a bastardized version in partnership with a retailer like Best Buy Co., Inc. (NYSE:BBY).
Convenience beyond the Web
Sodastream International Ltd (NASDAQ:SODA) has been an overnight success, two decades in the making. Already incredibly popular in Europe, the growing stable of consumer brands signing deals with SodaStream should help the home-brewed soda machine gain even more traction stateside. Simply put, the convenience of the Web has opened the eyes of many consumers to this kind of product.
Carrying gallons of pre-sweetened and bubbled water home at a premium cost to making it yourself, just doesn’t make sense for a lot of people. And with the ability to make healthier carbonated alternatives at home, even niche success will reward investors. And if a The Coca-Cola Company (NYSE:KO) or PepsiCo, Inc. (NYSE:PEP) were to sign a licensing deal, the sky is the limit.
Whole Foods Market, Inc. (NASDAQ:WFM) is showing that organic and “better for you” foods are more than just a small niche, as the company has grown to more than 300 stores and is targeting more than 1,000 over the next couple of decades.
And it’s done it with a simple formula of keeping the interest of all stakeholders at the core of everything that it does. The truth is that if customers, suppliers, and employees are all rewarded, shareholders will be, too. And that’s been the case with Whole Foods for more than 20 years. Seeing the mass-market grocery chains expand their organic and “better for you” product offerings doesn’t so much strike me as a risk to Whole Foods Market, Inc. (NASDAQ:WFM), as a validation that the future is as bright as the past.
It’s more than just electronics and groceries
Tesla Motors Inc (NASDAQ:TSLA) is changing more than just the way we “fuel” our automobiles: It is changing the way we buy them. Having already faced and defeated lawsuits in several states by traditional automobile dealers claiming that Tesla couldn’t only have “direct sales” outlets, the company has made it plain that it wants to break the mold of high-pressure, low-trust sales tactics that makes the car-buying experience one that most people hate.
And while there have been some speed-bumps along the way with making the delivery process as smooth as possible, this Apple-like focus on the customer experience will go a long way towards long-term success. Not to mention making an amazing car that gets better than 80mpg-equivalent, and can go zero-to-sixty in 4 seconds!
Foolish bottom line
All of these companies have found a place in my portfolio. I own shares of all of them, and will be adding more over the rest of the year. Go here to see more, down to the price I paid, and how I’m doing versus the market. And while I don’t know what will happen in the next few months, I expect all five of these companies to beat the market over the next few decades.
