MIAMI - MAY 17: Glazed Krispy Kreme doughnuts are seen May 17, 2004 in Miami, Florida. Krispy Kreme ... [+]
The pandemic years have taken a toll on the retail and consumer sectors. However, some companies have adapted to the changing environment, taking leadership roles in customer service, product excellence, alternative delivery options and e-commerce. In our MoneyShow Top Picks 2022, numerous advisors chose retail and consumer names as their favorite investments for the year ahead.
Michael Brush, Brush Up on Stocks
Krispy Kreme (DNUT) has been popular for 83 years, but it only recently hit the market again as a public company. You should take advantage of this and buy the stock as a play on an iconic brand, a powerful growth model, and the consumers’ ongoing love of sweets.
The company describes its doughnut line as an “affordable indulgence,” particularly its original glazed doughnut which it says offers a “melt-in-your-mouth experience.” It also has a cookie line called Insomnia, developed in a college dorm room in 2003.
Yes, sweets get a bad name. But let’s be honest, people still love them. Krispy Kreme posted a compound annual revenue growth rate of 19% over 2016 to 2020. During the same time, what it calls “points of access” increased 45% to 8,275 from 5,720 (its own stores, and its display cases in retailers etc.).
The company has a plausible roadmap for growth, in my view.
1) It has plenty of room to grow in several key U.S. markets where it is underrepresented, such as New York, Chicago, Boston and Minneapolis. It also thinks it has a lot of room to grow in China, Brazil, and parts of Western Europe. Not all U.S. products export well, but Krispy Kreme has a track record of successfully entering foreign markets in the Philippines, South Africa, Guatemala and Saudi Arabia.
2) Next, Krispy Kreme wants to keep expanding into the third-party retail channel by expanding its partnerships with retail outlets. Here, the company is acting on two fronts.
* It has a “delivered fresh daily” operation. Krispy Kreme deploys branded, in-store display cases in grocery and convenience stores. The prominent placement “creates a greater degree of impulse purchasing and ensures that Krispy Kreme remains top-of-mind,” says the company.
* It will continue to roll out its Branded Sweet Treat Line’s products. It already offers nine different shelf-stable packaged products, including Doughnut Bites and Mini Crullers. It wants to introduce more products linked to seasonal events, and big cultural events.
3) It has room to grow its e-commerce and delivery business, via “click and collect” or home delivery.
We just got evidence this growth plan is working. Krispy Kreme posted 18% year-over-year sales growth in the third quarter, and it expanded global “points of access” by 46% to more than 10,000. Then on December 20 it reiterated its 2021 projection for 23% sales growth, tightening up the low end of growth guidance to 22% from 19%.
Bruce Kaser, Cabot Turnaround Letter
TreeHouse Foods (THS) — which operates in the private label food business — is my top speculative idea for the coming year. As a major contract producer of private label foods, TreeHouse has struggled with poor execution and elevated debt resulting from its acquisition-driven strategy. While the private label food industry has continued to grow, TreeHouse’s results have continued to sag.
Efforts starting in 2016 to improve its inefficient operations, including divestitures and the replacement of the original CEO in March 2018, have proven only modestly effective.
The shares are 60% below the 2016 peak, and now trade only modestly above the 2005 spin-off price. Nevertheless, the company remains profitable and generates reasonable free cash flow.
While third quarter results were dreary, as expected, demand for TreeHouse’s products is ahead of its production ability, and consumers appear to be incrementally shifting back to the lower-priced store brands that TreeHouse produces. Also, the margin squeeze from higher costs will increasingly be offset by better pricing.
Critical to our thesis, respected activist investor JANA Partners has steadily built a stake, now at 9.2%, and holds two board seats. Their standstill agreement expired on December 15, so it is likely that JANA will step-up its pressure to either sell the company or change its strategy and leadership. Trading at only 9.6x estimated 2022 EBITDA, the shares offer considerable upside.
Keith Fitz-Gerald, Five with Fitz
I like to find and buy the world’s best companies, ideally when they’ve been kicked to the curb and otherwise left behind; this is often a deceptively simple and secure path to profits. I think Starbucks Corporation (SBUX) could be one of the great sleepers this year for a few reasons.
First, omicron or not, people around the world have had it with being cooped up. Many want to go out and they want a little luxury when they do. Paying $6 to $8 for flavored water goes a long way towards making that a reality.
Second, Starbucks excels at growth. Not surprisingly, that’s where management intends to take things in 2022. Margins will suffer given supply chain problems or so goes conventional wisdom but that’s a ruse best left to other investors who can’t see past the limits of their own thinking.
Some 70%-75% of growth will come from newly opened international locations where margin pressures are less severe. Further, Starbucks margins on ready-made-products including those sold to Keurig fans and via Costco may be 50% or higher. Growing those business segments will further boost profits.
Starbucks has raised dividends for 11 consecutive years which means that the company is arguably a “blue-chip” in disguise. Not the growth player most people think it is.
Third, Starbucks knows how to attract and keep customers better than almost any other company on the planet. Most Starbucks buyers are repeat customers. Management has prioritized customer reward and loyalty programs and that’s reflected by 24.8 million card-carrying, coffee guzzling, pastry munching folks who account for more than 50% of all money spent in Starbucks stores.
At the same time, management estimated last month that holiday spending could result in another $3 billion added to gift cards but I think the real figure could be $4-$5 billion by Q1 2022 which is significant considering that 10% may never get spent! Banks wish they had it this good. Customers deposit in cash but withdraw in coffee. My target is $140 within the next 12-24 months.
Action to Take: Buy under $110 and on additional weakness. Anything under $100 is a steal like it was last February but the markets may not present that opportunity again. (Disclosure: Keith Fitz-Gerald owns and trades shares of both Starbucks as do members of his family.)
The performance of Williams-Sonoma (WSM) during the COVID-19 crisis increases our confidence in management’s ability to drive sales with innovative products, improve operating efficiency, and generate cash.
Williams-Sonoma is a leading specialty retailer of products for the home. The San Francisco-based company operates 614 retail stores under the Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Rejuvenation nameplates.
While significant economic uncertainty remains, we believe that the COVID-19 crisis has caused investors to differentiate between companies like WSM, with business models that are well positioned for the future, and those that face significant challenges.
The company's performance during the COVID-19 crisis increases our confidence in management's ability to drive sales with innovative products, improve operating efficiency, and generate cash. WSM has raised the dividend three times during the pandemic and announced two new share repurchase plans.
We are evaluating an increase in our financial strength recommendation to Medium-High, which would be the same level as Costco (COST), Walmart (WMT), Colgate (CL), and Target (TGT).
Our five-year earnings growth rate is 9%. There are several reasons that we expect WSM to keep growing. Most notable is that CEO Laura Alber and the company’s designers have shown that they can maintain their rare knack for building brands and product lines from scratch.
CFO Julie Whalen said recently that she expected the company to benefit from a strong housing market, the permanent adoption of “hybrid work,” the shift to online shopping, and the interest of younger investors in companies like WSM with strong corporate values and a focus on sustainability.
The company is selling unique merchandise and has excellent tools for analyzing e-commerce and developing marketing plans. It also has an improving supply chain and delivery network, and a good balance of physical stores and e-commerce.
Over the last five years, WSM has raised the dividend at a compound annual rate of 10.6%. WSM has raised the dividend three times during the pandemic and announced two new share-repurchase plans. The indicated dividend yield is approximately 1.7%. Our 12-month target price is $250.
For 2022, my top contrarian pick in the Dow Industrials is Walt Disney (DIS). The stock was the worst-performing stock in the Dow in 2021. Disney has been hurt by a litany of problems:
• Wall Street has soured on these shares a bit due to a slowdown in growth in the company’s streaming business.
• Media and entertainment stocks have been out of favor on Wall Street, as investors seem concerned about the lingering impact of Covid on operations.
• Wall Street seems underwhelmed by the company’s relatively new CEO, Bob Chapek. In fact, rumors are starting to surface that Robert Iger, the former CEO, could be coming back to run the company. Admittedly, I am skeptical that you’ll see such a move, but the fact that these rumors are being floated indicates that folks aren’t sold on Chapek.
To be sure, while the last year has been a bit unfriendly to investors, Disney still has a lot in its favor, such as strong brands and an enviable ability to monetize its various content and entertainment assets. Theme parks and resorts are clearly on a recovery path that should continue in 2022.
And the company’s filmed entertainment business should strengthen as more people return to the theaters. And the company’s streaming business, which was bound to see a growth slowdown after its supercharged start, represents a significant growth avenue for the long term.
Taken all together, Disney still offers a lot to like for investors who are willing to look past some of the near-term headwinds. I think the stock is set up for a nice rebound in 2022 and regard it as a high-quality contrarian pick.
Please note Disney offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company. Minimum initial investment is $200. The firm will waive the minimum if an investor agrees to automatic investment via electronic debit of a bank account of at least $50. The plan administrator is Computershare (www.computershare.com).
Jon Markman, Strategic Advantage
2022 is going to be the year everything returns to normal, yet investors are going to discover that everything has changed; big companies that you thought you knew have been completely remade, for the benefit of shareholders. During the course of this year I expect a big rally for Nike (NKE) — the athletic shoe and apparel company that has become synonymous with athletic champions.
From Michael Jordan and Tiger Woods to Cristiano Ronaldo, the Portuguese soccer super star, Nike executives have paid top dollar to associate the business with winners.
That strategy has made the brand extremely valuable. Research from Brand Finance found in April that Nike is the number one-rated apparel brand in the world in 2021. The Beaverton, Ore.-based company retains that title for a seventh consecutive year.
Brand awareness has allowed Nike to rejigger its business model. The global pandemic and digital transformation revealed a new business vector for Nike, and it is a game-changer. Executives quickly discovered that consumers were more than happy to buy their products online, sight unseen.
Typically, Nike would have to share part of the retail price with Foot Locker (FL), Target (TGT) or any of the tens of thousands of retailers that carry its footwear and apparel. Switching a good part of that trade online removes the middleman. Nike gets the entire retail price, and that fat margins that come along with the sale. It means much larger profits and free cashflow.
Following the fourth quarter financial results in May, CFO Matt Friend said he expected that moving more of the overall business toward a direct-to-consumer model could push profit margins into the middle 40% range.
Shares have been mired in a trading range since then. Analysts are worried about the global supply chain and bottlenecks in Southeast Asia. That is short term thinking. Supply constraints will ease, yet Nike’s business model is being changed forever, to the benefit of shareholders.
The stock trades at 35.5x forward earnings and 5.7x sales. This is within the historic valuation yet the business is fundamentally changing. Margins are risings and cashflow is growing briskly.
Based on margin expansion, I expect Nike shares to jump to the $275 level over the next 18 months, a gain of 63% from current levels. Nike is ready to fit into a new valuation.
Steve Reitmeister, Reitmeister Total Return
You likely already know about Best Buy (BBY); there is probably a store is within 10 minutes of your home. Unfortunately the following thought may be rolling through your mind “Hey isn’t Amazon hurting their business?”
That was a fair question 5+ years ago. Gladly management has answered that question spectacularly by making fundamental changes that have led to consistent growth and shareholder returns. In fact, they have not had an earnings miss in over 5 years which puts their management team on the Honor Roll.
The funny thing is that these shares were soaring earlier in Q4 of 2021 going from $103 to $140 into earnings. However, investors decided to take some profits off the table. And next came the Omicron scare that hit all brick and mortar retailers hard. Next thing you know shares are pressing under $100 as we close the doors on 2021.
Yes, that is insane. But gladly it provides a stellar opportunity to snap up these quality shares. This sell off leaves Best Buy with a PE under 10 when the S&P stands at 24X earnings. Thus it's not surprising that the average Wall Street target price is $140. Even better, some top analysts see $150 to $175 as a more likely destination for shares.
So far we have checked the box for growth and value. Now let's talk about income. BBY sports an attractive 2.8% dividend yield. Yes, there are companies with much higher yields, but I would say that could be dangerous choice in 2022.
Why? That’s because the Fed has made clear that they intend to fight inflation in the coming year with a more aggressive taper for their massive monthly bond buying program. That will likely be followed by 3 rate hikes in 2022.
As they say, “Don’t Fight the Fed”. In this case they are telling you loud and clear that bond rates will move higher. And when that happens bond funds will lose money breaking a nearly 40 trend of bond funds enjoying gains as rates headed lower and lower and lower.
However, bond funds will not be the only investment punished. So too will high dividend yield stocks where there is not enough earnings growth to attract new investors to purchase shares.
This means that if you are going to venture into the income camp in 2022, then you absolutely need to make it a growth and income pick like BBY. Now you can appreciate that these shares offer a trifecta of goodness: growth, value and ample income.
Faris Sleem, The Bowser Report
FlexShopper (FPAY) is a financial technology company that enables consumers utilizing its e-commerce marketplace to shop for brand name electronics, home furnishings and other durable goods on a lease-to-own (LTO) basis.
It effects these transactions by first approving consumers through its proprietary, risk analytics-powered underwriting model; then collecting money from consumers under an LTO purchase agreement and funding the LTO transactions by paying merchants for their goods. FPAY offers its products through the FlexShopper website and holds several registered patents and patent applications on aspects of its LTO system.
LTO transactions outside of brick and mortar stores created the virtual LTO (vLTO) market and plenty of opportunity to go along with it. Customers that use FlexShopper for vLTO offerings make weekly payments debited via automatic ACH and can save money with attractive early payoff options.
Strong consumer demand and organic growth have driven revenue higher over the past few years. By expanding its offerings and range of customers, FPAY has made FlexShopper a reputable brand.
This branding and higher repeat customers makes us confident that the company will maintain revenue growth. The company recently announced that net revenues and fees for 3QFY21 were $30.9 million, up 25% from $24.6 million in the same period last year.
FPAY is a growth stock with a solid business model and confident insiders. It is a Top Pick for 2022 with the caveat that this is a high risk investment idea. Insiders have purchased 983,902 shares over the past year and have a history of heavy accumulation. This is clearly a vote of confidence in the company and its potential to keep dominating the LTO market. Although it is overvalued, the growth stock offers a unique long-term investment opportunity at its current share price.
