Profits, Social Awareness Can Mix Very Well

 | Feb 14, 2013 | 11:30 AM EST  | Comments
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As investors, many of us probably have acquaintances who view our profession with disdain. Mention investing, capitalism or money, and the stereotypes instantly kick in: robber barons, greed at all cost.

This is unfortunate, but more often than not, these prejudices against capitalism and investing are often borne by people who know very little about the profession. Every profession has its unscrupulous lot, and judging an industry by its outliers is a rather narrow-minded viewpoint.

In fact, it's precisely because of capitalism that those who oppose it get to enjoy what they view as the "moral" or "conscious" by-products of society. And without investors, innovators and entrepreneurs who are motivated by prospects of profit, these wonderful goods and services would cease to exist.

Consider Whole Foods (WFM), the most profitable grocer in the industry, on the basis of profit margins. Whole Foods essentially began as a one-store cooperative. Founder John Mackey quickly realized the potential market and demand for natural, wholesome foods, and Whole Foods was born. Mackey had a vision -- a company that would maximize returns for all its constituents: customers, employers and owners.

As an investment, Whole Foods has been a stunning success. The financial crisis sent Whole Food shares below $10 a share. Today, shares trade for $90. In fact, Whole Foods belongs to a growing group of companies that aim to promote what is getting known as "conscious capitalism." For investors, the long-term return potential is enormous. Names such as Chipotle Mexican Grill (CMG), Panera Bread (PNRA), Starbucks (SBUX), Apple (AAPL) and, yes, even Wal-Mart (WMT) are proving this concept. These companies are making real profits and in some cases have proven that their model has competitive advantages.

Chipotle decided many years ago that it was going to source its meat and other food products from local producers and farmers that practice sustainable agriculture. In other words, Chipotle decided it was going to pay more for its raw materials, even though the elementary investor is taught to believe that higher input costs hurt profits. Chipotle had to charge its customers a little more because of its higher-quality ingredients.

Instead of struggling, Chipotle has increased its sales and profits by double digits for years. Net margins of 10% are virtually unheard off in the fast casual food segment. I nibbled on shares when they started falling below $270, realizing that value doesn't always come from a low P/E ratio. Chipotle will be in my portfolio for years, if not decades. The company operates 1,600 restaurants, and given the demand curve for better-quality foods, its growth curve is still in its infancy.

Unfortunately, the valuations of many of these companies today are a bit stretched, but I would keep a watch list of these businesses and the others like them. They are doing things unconventionally -- paying more for raw materials, better pay for employees -- but they continue to produce unconventionally high profits and returns on equity. And investors have been enriched at above-average rates .

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